Beating Income Returns With Strong Dividend Stocks
- Photo Credit: Nicholson Cartoons
Investors are fearing the risks associated with the stock markets and have since pushed income yields to record lows. In a time when CD rates have plummeted to as low as 3% per year on 5 year CDs, and Treasury bonds are being sold at near zero interest rates, the stock market provides much better returns in high dividend stocks that will be around for some time to come.
Capital Gains and Income
Dividend stocks are known for their staying power, even in difficult times. Because of their yields generated from cash dividend payouts, investors are less likely to dump shares when panic hits the market. Instead, investors pile money into high dividend stocks as a way to limit downside risk in the event of further stock market drops.
Most dividend earners are blue chips
The popular big dividend stocks are blue chip stocks that are well branded and well capitalized to make it through hard times. Many of these companies pay comparatively high dividends simply because their business lacks the ability to expand at the rates you might expect from smaller growth and value companies. Consider Wal-Mart, which has thousands of locations and will have a hard time expanding their business in the United States, or McDonald’s which pays a decent 3.4% dividend yield. Neither of those businesses have a better use for their capital, and therefore, turn it over to shareholders who are happy to reap the benefits.
What to look for in dividend stocks
Finding the best high dividend stocks to invest in can be a difficult task. Investors should be wary of stocks that are paying incredibly high dividends, as its likely the result of a dividend that is soon to be lowered. Investors will rarely push up the dividend yield of a quality stock past 4.5-5% per year, as at that point, the stock is a very likely investment for near cash equivalent status. If the stock were such a good buy, investors would be pouring cash into the firm with 6% yields. It’s “buyer beware” when the dividend yields get a little too high.
Growing dividend yields
Dividend yields, like any expense to the business, are recorded as a cash outflow to the company. In many instances, the best stocks are those that strengthen their dividend year over year, as these are the companies that can afford to shell out billions to their shareholders. On the contrary, avoid stocks that have recently lowered their dividend, even if the yield is still high against its competitors, as the chances are good the company is facing financial difficulty.
A Strong Return on Equity
The ROE, or return on equity, is one of the most important numbers that is published by any public company. The ROE shows exactly how effective the company is at generating profits from their holdings and investments, and how likely the company is to increase its dividend in the months and years ahead. Many investing publications, such as Investors Business Daily, publish the ROE to show investors how strong or weak the current profit margins truly are. Compare the ROE to similar companies in the same industry to find the best of breed.
Know the Risks
Investing in dividend stocks is not guaranteed, and in many instances, capital loss may minimize any expected profits from the stock. In today’s market climate, buy dividend stocks only if you are confident the market should soon recover, as the daily volatility of many corporations far exceeds the yield of the dividend.