In this uncertain stock market, one all-weather investing tactic makes especially good sense: own stocks that pay an attractive dividend yield.?
“Dividends pay out all the time. It doesn’t matter what is going on in the broader market,” says Kelley Wright, the managing editor of Investment Quality Trends, a dividend oriented stock letter.?
Dividend stocks?are not just defensive; they play offense too. John Buckingham, editor of the Prudent Speculator stock letter, notes that yield plays outperform even when interest rates are rising. They also outperform with less volatility. “You get the holy grail of higher investing returns with lower risk,” Buckingham says. ?
Dividend stocks also command authority. Dividends account for 37% of the S&P 500’s
That’s what Cabot Dividend Investor editor Tom Hutchinson believes. He says we are in a phase of sustained higher inflation and interest rates, since historically it has taken years to quell inflation. These conditions favor dividend stocks. During prior sustained periods of high interest rates and inflation in the 1940s and 1970s, dividends contributed 62% and 73% of market return, he says.?
Moreover, dividends tend to grow over time. Companies with solid businesses, backed by sound balance sheets, continually raise their dividends. This serves as a nice inflation hedge. Warren Buffett just brought this concept home in his most recent Berkshire Hathaway
Buffett wrote that the annual dividend payout on his 400 million shares of Coca-Cola
Bank of America analysts also point to four other reasons why dividend stocks are important additions to your portfolio.
First, the S&P 500 dividend payout ratio is near historical lows. This means companies have a lot of room to raise dividends.
Second, Dividend per-share growth has lagged earnings growth by about 40% over the past two years. Dividend hikes normally follow earnings per share (EPS) growth. The recent lag tells us dividend growth is about to accelerate to catch up.?
Third, people are living longer. More people will buy yield stocks to prepare for retirement and old age, and they’ll hold them longer.?
Finally, income funds represent 40% of active management today vs. 10% in 2010. This creates greater demand for yield stocks, and puts a floor underneath them.?
Eight dividend plays to consider?
Here are six stocks dividend experts like, and two favored by corporate insiders.?
1. Morgan Stanley: To find discounted yield stocks, the newsletter Investment Quality Trends favors names that have fallen enough to boost dividend yields near peak levels. (Assuming no dividend cuts, yields rise when stocks fall.) The investment bank and brokerage Morgan Stanley
2. Lowe’s Cos.: Shares of this home improvement retailer have weakened enough to drive its yield above the 2% where it normally peaks out. Lowe’s
3. Bristol Myers Squibb: Buckingham at the Prudent Speculator singles out this pharma giant. Investors appear skeptical of Bristol Myers Squibb s
4. NetApp: Buckingham also favors this software company which offers cloud and storage services. He says a solid balance sheet supports the dividend, and the NetApp
5. ONEOK: Hutchinson at Cabot Dividend Investor likes this midstream energy play which benefits from steady growth in demand for natural gas pipelines. ONEOK’s
6. NextEra Energy: Hutchinson also suggests this Florida electricity utility which has a renewables business that’s finally turned profitable. NextEra Energy
Plus: 2 energy stocks that insiders are buying
At my own stock letter, I follow corporate insider buying for leads on stocks to evaluate. Recently there’s been active insider buying at two energy giants with attractive yields. At ConocoPhillips
Avoid covered call ETFs
Videos promoting covered call exchange traded funds (ETFs) have become popular on YouTube. These ETFs own stocks and sell covered calls against them to produce income. Some brandish enticing yields of 12% and more.
Sadly, YouTube channels touting the high yield (one video unfortunately has 1.4 million views) leave out a crucial detail: You can lose a lot of money in covered call ETFs. The reason: Selling covered calls for income works out great until a stock rockets up through your strike price. Then you are obligated to sell someone the stock at a price below market levels, giving up a lot of upside. Since markets generally go up over time, this happens a lot.?
The bottom line: Dividends are valuable in investing. But beware of YouTube and videos and other promotions offering dividend gimmicks as part of their “quick path to early retirement” clickbait.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned shares of NEE. Brush has suggested MS, LOW, BMY, OKE, NEE and COP in his stock newsletter,?Brush Up on Stocks. Brush writes the Cabot SX Cannabis Advisor. Follow him on Twitter @mbrushstocks.
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