In this issue of “10-dividend stocks we like now,” we scan our database for the ten companies with strong fundamentals to add income to portfolios.
I previously discussed in “GE – Bringing Investment Mistakes To Life,” the fundamental investor fallacy of “I bought it for the dividend.” However, the most critical point was what we are currently seeing, as the pandemic is crushing corporate revenue. To wit:
“While I completely agree that investors should own companies that pay dividends, it is also crucial to understand that companies will cut dividends during periods of financial stress. During the next major market reversion, we will see much of the same happen again.”
With a litany of companies that have cut, and even eliminated dividends, that risk has come to fruition.
However, this doesn’t mean dividends aren’t important. If you look at our portfolios, you will see we have a preference for high-quality names that pay dividends. We usually screen our database of over 8000 stocks for companies that fit several fundamental and value factors. Such ensures we are buying top-quality names and lowering bankruptcy risk.
For today’s purpose of a specific dividend focus, we are looking for companies that are members of the S&P 500 index. They must also have a history of growing dividends over the last 5-years and a declining payout ratio relative to their earnings. We are taking only the top 10 highest rated stocks.
The criteria for our Dividend screen are:
- Market Capitalization > $1 Billion
- Index Constituency: Must Be A Member of the S&P 500 Index
- Dividend Yield > 1%
- 5-Year Dividend Growth Rate > 0
- Change In Payout Ratio < 0
- Zack’s Investment Ranking = Top 10
The table below are the 10-candidates that resulted from the latest screening.
The combination of these fundamental measures should yield an excess return over the market.
The table below assumes that over the last 5-years you bought all 10-stocks and rebalanced them quarterly.
Over the 21-quarterly rebalancing periods, the portfolio had an annualized return of 11.4% versus the 10.8% for the market. This annual outperformance is likely better, however, since this is a quarterly rebalance, the data for Q2-2020 is not included as of yet.
With interest rates near historic lows, the price of money has been persistently lower in this economic cycle than in the past. This factor provides support for income-yielding stocks as a growing population of retirees, are seeking higher incomes.
The risk of this strategy is that valuations for many companies, including higher dividend payers, have expanded much more than usual. Such is reminiscent of the “Nifty-Fifty” period in the late 1970s.
While investing in dividend-yielding stocks certainly provides an additional return to portfolios, as “GE” reminds us, stocks are “not safe” investments. They can, and will lose value, and often much more than you can withstand.
For our “safe money” we continue to use rallies in interest rates to buy Treasury bonds. Bonds not only provide income, but safety of principal during a market sell-off.
Valuation and safety continue to be a top concern for investors. Such is especially the case with markets signaling more troubling technical trends. We believe the best way for investors to generate income is to invest in quality businesses at a discount to their intrinsic value. We focus on names that still maintain a fair valuation, are growing, and are well-founded in their industries. We think these names are more likely to offer investors a reasonable return on their investment.
Disclaimer: Nothing in this post should be construed as an offer to buy or sell any securities. This content is for informational purposes only. Past performance is no guarantee of future results. Use at your own risk and peril.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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