2020 has been a year like no other.
Tragic wildfires in Australia and California. Social justice protests and riots across the U.S. A contested presidential election. A pandemic that shuttered schools and businesses around the world during the spring, as well as reignited restrictions with the fall resurgence of the virus. A subsequent global recession.
The new normal has ushered in a wave of successful stocks that have led the S&P 500 to a new all-time high reached on Nov. 9, and the Dow to a new all-time high on Nov. 16.
The reality is that the events of 2020 have created a new environment that will linger well into the New Year. Looking forward, I’m personally expecting at least two more strong quarterly earnings seasons, mainly due to more favorable year-over-year comparisons.
There is also the V-shaped economic recovery that has persisted. Retail sales should remain strong during the holiday shopping season, even as some states re-impose lockdowns due to rising coronavirus cases. Consumer spending on goods is now higher than before the pandemic. Productivity has also improved dramatically this year, with more folks working from home and avoiding long commutes.
There’s a strong possibility that the FDA could approve a COVID-19 vaccine by yearend. And we know that the Federal Reserve is holding off on raising key interest rates about their near-zero level through 2022.
Now, it’s no secret that dividend stocks have been the laggards of the stock market in 2020.
Investors have largely shunned dividend stocks this year, which is an interesting development given the ultralow interest rate environment and the fact that the market yields much more than Treasuries. As an example, the Dow continues to yield about 2.5%, while the 10-year Treasury yield remains below 1.0%.
Our own Elite Dividend Payers Buy List has largely underperformed this year, but that’s all starting to change. As the washing machine market has returned, money has started to slosh to new corners of the market, including dividend growth stocks.
In fact, our Growth Investor Elite Dividend Payers have been some of our top performers recently. Our Buy List is up 10.3% in the past three weeks. So, dividend stocks are starting to return to favor, and I expect this momentum will continue.
Keep in mind that the dividend yield on the S&P 500 hangs at 1.8%. Remember, most dividends are tax-advantaged and taxed at a maximum federal rate of 23.8% while Treasury bonds are taxed at a maximum federal rate of 40.8%.
However, not all dividend stocks are created equal. But before I explain why, let’s take a step back and talk about what exactly a dividend is.
A dividend is a distribution from a company’s earnings paid directly to a class of its shareholders. It is up to the company as to when (or even if) it is paid. The dividends tend to be paid out on a quarterly basis, but some companies will pay a semi-annual or annual dividend. Company management will always announce when it will be paid – including your deadline to buy the stock in order to receive this payout – and what the dividend will be per share.
Now, the dividend yield varies depending on the company’s actual dividend and where the stock price is at the time. In some cases, you may be looking at a double-digit dividend yield. But as attractive as a double-digit dividend yield may sound, I recommend you pump the brakes before investing. Chasing dividend yields alone can be downright dangerous.
Stocks are not like Treasury bonds or a savings account: There’s no guarantee that you will get your money back. There’s also no guarantee that company will continue paying a dividend. If you choose poorly, you could lose your capital as the stock price falls. Or, that nice juicy dividend could be slashed.
In most cases, dividend yields are tantalizingly high for a reason (the stocks are cheap and rightly so) – and are simply not supported by the fundamental earnings power of the business.
This is why my Dividend Grader is so important. Just like my Portfolio Grader, it uses my proprietary formula to put each stock through a rigorous test, crunching reams of data against a set of criteria I’ve created.
This, in turn, tells us whether the stock is worth investing in or if we should be staying far, far away. Here are a few examples:
As you can see, each company has a huge double-digit dividend yield, but it also receives an “F” rating from Dividend Grader, as well as a “Strong Sell” recommendation. This is because of their dividend trend, dividend reliability, forward dividend growth and earnings are very, very poor.
Now, I don’t want to scare you away from dividends – far from it. I just want you to be aware of the potential risks. Investing in dividend stocks can also be very lucrative. If you get it right, you can make a fortune. Fundamentally strong dividend stocks pack a one-two punch of share price appreciation and a steady stream of income…with payouts that can be twice or five times what you get from a Treasury bond or a bank.
My Growth Investor advisor service features the crème de la crème of dividend growth stocks. A stock only makes it to our Elite Dividend Payers Buy List if it receives a “AA” rating, which means it must have an “A” rating in both Dividend Grader and Portfolio Grader.
In fact, I just recommended a brand-new AA-rated stock in my latest Growth Investor Monthly Issue. It has a solid dividend yield, great long-term potential and is still trading below my recommended buy limit. You won’t want to miss out on this exciting opportunity, so make sure to sign up here so I can reveal its name to you.
It’s no simple task to identify the best dividend stocks on the market, which is why Dividend Grader is such a handy tool to keep in your back pocket.
The bottom line: Don’t just jump into any dividend stock with a high yield. But if you stick with Dividend Grader, my proprietary formula will help you find the best of them and stay away from the worst.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: