In this uncertain stock market, one all-weather investing tactic makes perfect sense: own shares, which pay an attractive dividend yield.
“Dividends are paid all the time. It doesn’t matter what’s going on in the broader market,” says Kelley Wright, editor-in-chief of Investment Quality Trends, a dividend-focused stock market letter.
Dividend stocks aren’t just defensive; they also play offensively. John Buckingham, editor of the Prudent Speculator, notes that yields outperform even when interest rates rise. They also outperform with lower volatility. “You get the holy grail of higher investment returns with less risk,” says Buckingham.
Dividend stocks have authority, too. Dividends make up 37% of the SPX of the S&P 500,
+1.76%
Total return since 1936 according to Bank of America research. Over the past decade, when low interest rates favored growth stocks (which typically don’t yield), that figure has fallen to 17%. This dry spell tells us that dividends will soon play a larger role in returns if mean reversion continues.
That’s what Cabot Dividend Investor editor Tom Hutchinson believes. He says we are in a period of persistently higher inflation and interest rates because historically it has taken years to suppress inflation. These conditions favor dividend stocks. In previous sustained periods of high interest rates and inflation in the 1940s and 1970s, dividends contributed 62% and 73% of market returns, respectively, he says.
Additionally, dividends tend to grow over time. Companies with solid businesses and strong balance sheets consistently increase their dividends. This serves as a nice inflation hedge. Warren Buffett just brought this concept home in his latest Berkshire Hathaway BRK.A,
+1.49%.
BRK.B,
+1.39%
shareholder letter.
Buffett wrote that the annual dividend payout on his 400 million shares of Coca-Cola KO,
+0.55%
was $75 million when he bought the position in 1994. By 2022, that had grown to $704 million. “Growth happened every year, just as sure as birthdays did,” Buffett said. He predicts that the Coke dividend will continue to rise. That $704 million per year now represents a 54% return on the original cost of his position, which was $1.3 billion.
Bank of America analysts also point to four other reasons why dividend stocks are an important addition to your portfolio.
First, the S&P 500’s dividend payout ratio is near historic lows. That means companies have plenty of room to increase dividends.
Second, per-share dividend growth has lagged earnings growth by about 40% over the past two years. Dividend increases typically follow earnings per share (EPS) growth. The recent lag tells us dividend growth will accelerate to catch up.
Third, people are living longer. More people will buy yield stocks to prepare for retirement and old age, and they will hold them longer.
After all, income funds now account for 40% of active management, up from 10% in 2010. This creates greater demand for yield stocks and puts a floor below them.
Eight Dividend Games to Consider
Here are six stocks that dividend experts like and two that corporate insiders favor.
1. MorganStanley: To find stocks with reduced earnings, the Investment Quality Trends newsletter favors names that have fallen enough to push dividend yields near the highs. (Assuming no dividend cuts, yields rise when stocks fall.) Investment bank and brokerage Morgan Stanley MS,
+1.90%
fits the bill. Its repeat high yield is 3.55%, and the current yield of 3.15% is close enough. The bank’s dividend payout is 45% of earnings, which is low. The bank has plenty of room to keep increasing its dividend. Over the past 12 years, it’s increased the dividend by an average of 10% per year.
2. Lowe’s Cos.: This home improvement retailer’s shares have fallen so far that its yield has surged past the 2% where it normally peaks. Lowe’s LOW,
+0.54%
has also increased its dividend by an average of 10% over the past twelve years. That trend and relatively low payout ratio of 41% suggest Lowe’s has plenty of room to sustain dividend increases, notes Investment Quality Trends.
3.Bristol Myers Squibb: Buckingham at the Prudent Speculator highlights this pharmaceutical giant. Investors skeptical of Bristol Myers Squibbs BMY,
-0.56%
Ability to offset the pressure of losing patents for Opdivo against cancer and Eliquis against blood clots in 2028. However, the company has a strong pipeline of potential therapies, including Camzyos for cardiomyopathy, Opdualag for melanoma, Zeposia for multiple sclerosis, and Sotyktu for psoriasis. The stock is trading for less than nine times forward earnings estimates, well below the historical average. Buckingham has a target price of $102.
4. NetApp: Buckingham also favors this software company that offers cloud and storage services. He says a solid balance sheet supports the dividend, and the NetApp NTAP,
+1.52%
The stock looks cheap compared to its history and peers. It has a forward P/E of 12. Buckingham believes continued demand for cloud services will support growth. He has a price target of $96 on the shares.
5. ONOK: Cabot Dividend Investor’s Hutchinson likes this midstream energy play, which is benefiting from ever-growing demand for natural gas pipelines. ONEOK is OK,
+0.23%
Earnings per share rose 28% in the fourth quarter and 15% for all of 2022.
6. NextEra Energy: Hutchinson also suggests this Florida electric utility, which has a renewable energy business that’s finally turned profitable. NextEra Energy NEE,
+0.94%
Stocks are down despite solid earnings growth in the fourth quarter of 2022. During the period of weakness, insiders bought $1.7 million worth of shares in the $70 to $75.44 range, according to The Washington Service.
Plus: 2 e.gEnergy stocks that insiders are buying
In my own stock market letter, I track insider buying of companies to get clues about stocks to rate. Recently there has been active insider buying in two energy giants with attractive yields. At ConocoPhillips COP,
+1.22%,
A director bought $1.2 million worth of shares in mid-February at about $104 per share. At Devon Energy DVN,
+2.55%,
CEO Richard Muncrief bought $798,000 of stock at about $53 in mid-February and a director bought $250,000 of stock at about the same price in mid-February.
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 generate income. Some boast tempting returns of 12% and more.
Unfortunately, YouTube channels promoting the high return (one video sadly has 1.4 million views) leave out a crucial detail: There’s a lot of money to lose on covered call ETFs. Why: Selling covered calls for income works great until a stock skyrockets through its strike price. Then you are obligated to sell someone the stock at a price below the market level, giving up a lot of upside potential. As markets generally rise over time, this happens frequently.
Conclusion: Dividends are valuable when investing. But beware of YouTube and videos and other promotions that offer 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 held shares in NEE. In its stock newsletter, Brush suggested MS, LOW, BMY, OKE, NEE and COP polish stocks. Brush writes the Cabot SX Cannabis Advisor. Follow him on Twitter @mbrushstocks.
More: This cash cow stock strategy attracts big money. Here are the top 10 picks.
Plus: If ailing bank stocks look tempting right now, these buying tips can help you make money
Buffett loves cash dividends, and so should you — plus 8 higher-yielding stocks to get you started.
In this uncertain stock market, one all-weather investing tactic makes perfect sense: own shares, which pay an attractive dividend yield.
“Dividends are paid all the time. It doesn’t matter what’s going on in the broader market,” says Kelley Wright, editor-in-chief of Investment Quality Trends, a dividend-focused stock market letter.
Dividend stocks aren’t just defensive; they also play offensively. John Buckingham, editor of the Prudent Speculator, notes that yields outperform even when interest rates rise. They also outperform with lower volatility. “You get the holy grail of higher investment returns with less risk,” says Buckingham.
Dividend stocks have authority, too. Dividends make up 37% of the SPX of the S&P 500,
+1.76%
Total return since 1936 according to Bank of America research. Over the past decade, when low interest rates favored growth stocks (which typically don’t yield), that figure has fallen to 17%. This dry spell tells us that dividends will soon play a larger role in returns if mean reversion continues.
That’s what Cabot Dividend Investor editor Tom Hutchinson believes. He says we are in a period of persistently higher inflation and interest rates because historically it has taken years to suppress inflation. These conditions favor dividend stocks. In previous sustained periods of high interest rates and inflation in the 1940s and 1970s, dividends contributed 62% and 73% of market returns, respectively, he says.
Additionally, dividends tend to grow over time. Companies with solid businesses and strong balance sheets consistently increase their dividends. This serves as a nice inflation hedge. Warren Buffett just brought this concept home in his latest Berkshire Hathaway BRK.A,
+1.49% .
BRK.B,
+1.39%
shareholder letter.
Buffett wrote that the annual dividend payout on his 400 million shares of Coca-Cola KO,
+0.55%
was $75 million when he bought the position in 1994. By 2022, that had grown to $704 million. “Growth happened every year, just as sure as birthdays did,” Buffett said. He predicts that the Coke dividend will continue to rise. That $704 million per year now represents a 54% return on the original cost of his position, which was $1.3 billion.
Bank of America analysts also point to four other reasons why dividend stocks are an important addition to your portfolio.
First, the S&P 500’s dividend payout ratio is near historic lows. That means companies have plenty of room to increase dividends.
Second, per-share dividend growth has lagged earnings growth by about 40% over the past two years. Dividend increases typically follow earnings per share (EPS) growth. The recent lag tells us dividend growth will accelerate to catch up.
Third, people are living longer. More people will buy yield stocks to prepare for retirement and old age, and they will hold them longer.
After all, income funds now account for 40% of active management, up from 10% in 2010. This creates greater demand for yield stocks and puts a floor below them.
Eight Dividend Games to Consider
Here are six stocks that dividend experts like and two that corporate insiders favor.
1. MorganStanley: To find stocks with reduced earnings, the Investment Quality Trends newsletter favors names that have fallen enough to push dividend yields near the highs. (Assuming no dividend cuts, yields rise when stocks fall.) Investment bank and brokerage Morgan Stanley MS,
+1.90%
fits the bill. Its repeat high yield is 3.55%, and the current yield of 3.15% is close enough. The bank’s dividend payout is 45% of earnings, which is low. The bank has plenty of room to keep increasing its dividend. Over the past 12 years, it’s increased the dividend by an average of 10% per year.
2. Lowe’s Cos.: This home improvement retailer’s shares have fallen so far that its yield has surged past the 2% where it normally peaks. Lowe’s LOW,
+0.54%
has also increased its dividend by an average of 10% over the past twelve years. That trend and relatively low payout ratio of 41% suggest Lowe’s has plenty of room to sustain dividend increases, notes Investment Quality Trends.
3.Bristol Myers Squibb: Buckingham at the Prudent Speculator highlights this pharmaceutical giant. Investors skeptical of Bristol Myers Squibbs BMY,
-0.56%
Ability to offset the pressure of losing patents for Opdivo against cancer and Eliquis against blood clots in 2028. However, the company has a strong pipeline of potential therapies, including Camzyos for cardiomyopathy, Opdualag for melanoma, Zeposia for multiple sclerosis, and Sotyktu for psoriasis. The stock is trading for less than nine times forward earnings estimates, well below the historical average. Buckingham has a target price of $102.
4. NetApp: Buckingham also favors this software company that offers cloud and storage services. He says a solid balance sheet supports the dividend, and the NetApp NTAP,
+1.52%
The stock looks cheap compared to its history and peers. It has a forward P/E of 12. Buckingham believes continued demand for cloud services will support growth. He has a price target of $96 on the shares.
5. ONOK: Cabot Dividend Investor’s Hutchinson likes this midstream energy play, which is benefiting from ever-growing demand for natural gas pipelines. ONEOK is OK,
+0.23%
Earnings per share rose 28% in the fourth quarter and 15% for all of 2022.
6. NextEra Energy: Hutchinson also suggests this Florida electric utility, which has a renewable energy business that’s finally turned profitable. NextEra Energy NEE,
+0.94%
Stocks are down despite solid earnings growth in the fourth quarter of 2022. During the period of weakness, insiders bought $1.7 million worth of shares in the $70 to $75.44 range, according to The Washington Service.
Plus: 2 e.gEnergy stocks that insiders are buying
In my own stock market letter, I track insider buying of companies to get clues about stocks to rate. Recently there has been active insider buying in two energy giants with attractive yields. At ConocoPhillips COP,
+1.22% ,
+2.55% ,
A director bought $1.2 million worth of shares in mid-February at about $104 per share. At Devon Energy DVN,
CEO Richard Muncrief bought $798,000 of stock at about $53 in mid-February and a director bought $250,000 of stock at about the same price in mid-February.
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 generate income. Some boast tempting returns of 12% and more.
Unfortunately, YouTube channels promoting the high return (one video sadly has 1.4 million views) leave out a crucial detail: There’s a lot of money to lose on covered call ETFs. Why: Selling covered calls for income works great until a stock skyrockets through its strike price. Then you are obligated to sell someone the stock at a price below the market level, giving up a lot of upside potential. As markets generally rise over time, this happens frequently.
Conclusion: Dividends are valuable when investing. But beware of YouTube and videos and other promotions that offer 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 held shares in NEE. In its stock newsletter, Brush suggested MS, LOW, BMY, OKE, NEE and COP polish stocks. Brush writes the Cabot SX Cannabis Advisor. Follow him on Twitter @mbrushstocks.
More: This cash cow stock strategy attracts big money. Here are the top 10 picks.
Plus: If ailing bank stocks look tempting right now, these buying tips can help you make money
Source : www.marketwatch.com