All throughout the 10-year bull market, people were asking themselves: “Why bother with dividend stocks?” Well, now that the credit markets have gone off the rails – and central banks are scrambling to regain control – income stocks are looking a lot better. So today, I want to make sure that you are prepared to buy the RIGHT dividend stocks, when the dust settles in this market.
People are especially surprised that I recommend so many of them. “Aren’t you the growth guy?” And, in a word, yes. That’s why, here at InvestorPlace, my flagship newsletter is Growth Investor!
I know dividends are boring; they trade in a herky-jerky manager. 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. I expect that to be especially true down the road. We’ll maintain a healthy weighting in them in my Platinum Growth Club Model Portfolio and other buy lists.
After all, the central banks’ emergency efforts have paid off, with the 10-year Treasury slipping back to 1.06% and the 30-year Treasury dipping to 1.70%. In comparison, the S&P 500 has a dividend yield of about 3% and the Dow has a dividend yield of nearly 4%. So, investors can flee stocks, but the reality is that the stock market continues to yield more than anywhere else.
In my opinion, it is inevitable that dividend stocks will lead us out of the current mess.
With that said, I know that dividends will likely be cut by some companies. Occidental Petroleum (OXY) was the first company to slash its dividend, and it will likely be the first of many energy companies that cut their current dividends, as we explored last Friday. The fact of the matter is that the coronavirus outbreak and subsequent shutdown will weigh heavily on many companies’ earnings and, in turn, their ability to reward shareholders.
What investors in these high-flying oil companies learned is that the yields were tantalizingly high for a reason (the stocks got cheap, and rightly so) – and are simply not supported by the fundamental earning power of the business.
That’s why there are always four things I always want to see from any dividend stock; if not, it won’t even get a second look.
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.
If I’m making a dividend portfolio sound like a lot of work – well, in my Platinum Growth Club service, I do it all for you.
For Platinum Growth Club, I operate a highly selective Model Portfolio, where only the best of the best dividend stocks make the cut. These stocks are hand-picked by me and are designed to do well in any market environment. I call these my Elite Dividend Payers. And as global markets recover, I expect dividend stocks to lead the way.
Note: That’s not to say you want to only own dividend stocks. You need to make sure your portfolio is balanced, using a smart, yet very broad strategy. Apply that to the whole market (like I do each Saturday when I run my Portfolio Grader scans on nearly 5,000 stocks). Then, stick with the best of the best stocks– even in corners of the market you wouldn’t normally think to look.
Besides Elite Dividend Payers, like high-quality real estate investment trusts (REITs), that includes:
- Aerospace and defense
- Software for business applications, especially in the “cloud”
- And medical device companies…just to name a few.