In a bull market that’s so well-established, some of you might be asking yourselves: “Why bother with dividend stocks?”
People are especially surprised that I recommend so many dividend stocks. “Aren’t you the growth guy?” And, in a word, yes. That’s why, here at InvestorPlace, my flagship newsletter is Growth Investor!
When I recently held a live chat, one of my subscribers, John, was pretty annoyed with our dividend stocks, in fact. And it’s true that we’re only up about 18% in our Elite Dividend Payers portfolio. That’s nothing to sneeze at — I don’t want to be too hard on myself here — but our High-Growth Investments are up a lot more, almost 30%.
Well, here’s the honest truth about dividend stocks (just like I told him during the live chat): They are boring. They trade in a herky-jerky manner. You’ll get stock appreciation…if you hold them long enough.
But let’s not forget that dividend stocks often zig when the growth stocks zag. This is why I always recommend owning them — because they make your overall returns smoother.
That’s something to keep in mind right now — with the market churning around near all-time highs.
I’m not saying stocks are about to tank. It’s just that this market is kind of like the Tour de France: You’re going to have a very narrow pack pulling ahead this earnings season. And it’s not just the FANG stocks — Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOGL) — that will be leading anymore. (Just look at what happened to Netflix yesterday!)
Bottom line: You definitely want to be in the stocks that are riding with the leaders.
And at a time when the Federal Reserve is talking about cutting interest rates (and Europe and Japan are already negative), where are you going to turn for income?
Dividend stocks. Some of my favorites pay 3%, 4%, even 6%.
But…you’ve got to choose wisely. In a narrow market, you only want to own the best of the best.
The Four Things I Demand from Any Dividend Stock
The first thing I always look for in a dividend investment is the company’s ability to increase their dividend payments. So, when I assess a stock’s Dividend Trend, I look at the last four quarters of payments to see if they are growing, unchanged or decreasing. If a company has to cut its payout, that’s generally a bad sign — not just for the yield, but for the stock itself, too.
The second is Dividend Reliability. Has the company been paying for years without missing? Or has it had some gaps during times of trouble? Consistent payments is a great sign, and this plays a big role in whether you should buy, sell or hold the stock.
Then you want Forward Dividend Growth. This factor requires some homework on my part…looking at growth estimates for the company and for its dividend. Inflation is very real, and you certainly don’t want a dividend stock that can’t offer increasing payouts over time.
Lastly, I look at Earnings Yield. Essentially, I gauge the company’s earnings quality; if it scores highly, this can signal future dividend increases, or at least a strong ability to pay dividends. If it scores poorly, the opposite is true.
Plug a ticker symbol into my Dividend Grader, and it’ll deploy these four criteria for you! For instance, some of you might be wondering about Coca-Cola (KO), which reports earnings next week. Here’s how KO measures up:
Like my Portfolio Grader, you get Dividend Grader’s analysis in simple letter grades: A through F (just like in school). As you can see, Coca-Cola currently leaves a little to be desired, from an income perspective.
But Portfolio Grader uses different criteria: the company’s fundamentals, plus institutional buying pressure (reflected in its Quantitative Score). That’s because it is designed to pick growth investments.
Which is better? People have been debating that forever, and probably always will. But here’s the good news: You don’t have to choose.
Remember, the market is highly cyclical, with different stocks taking turns in the spotlight. So if you want a share of the gains when growth stocks are in favor — and again when income stocks are in favor — you’ll need exposure to both.
Here’s Where to Look for the Best Growth Investments Now
Right now, scientists are developing the next generation of computing technology. And once it’s widely available, it’ll trigger what Forbes called the “Next Industrial Revolution.”
Already, computers have made life easier and more efficient. But there’s still a lot of room for human error. People trip over cords, spill their coffee, and get tired.
That’s why the second wave of computers will not only work with massive amounts of data, but they’ll interpret it themselves. And they’ll communicate and learn from each other. We need machine learning — artificial intelligence (AI) will take everything to a whole other level.
And as an investor, you still have the chance to get in on the ground floor.
But you don’t need to be an AI expert to take part! I’ll tell you everything you need to know, as well as my buy recommendation, in my special report, The A.I. Master Key, which I just posted in Growth Investor. The stock is still under my buy limit price — so you’ll want to sign up now; that way, you can get in while you can still do so cheaply.