Investors have been chasing dividend-paying stocks in recent years in search of yield and lower volatility relative to higher-growth companies.
For example, income investors have been obsessed with companies that are returning capital to shareholders through dividends and buybacks. Low interest rates have helped fuel demand for dividends, but now the Federal Reserve is expected to further scale back its bond purchases, which could push rates higher.
It may also be tougher to find value in dividend-paying stocks this year after such a big rally. Some investors have plowed into “bond-like equities” for yield and perceived safety, so some dividend stocks may be overvalued.
“So much money has flowed into high-yielding stocks in recent years that it has made them expensive by historical market measures,” writes Michael A. Pollock for MarketWatch. “That means, at best, big dividend payers will probably underperform other areas of the equity market if stocks continue to rally. And in the event of a major market correction, they may provide less downside protection than usual, or even lose value.”
What are the advantages of dividend stocks? Income is obviously a major attraction, although dividends are not guaranteed. Also, a company with a solid dividend history tends to have strong management and good corporate governance.
However, some traditionally defensive and dividend sectors such as utilities have suffered as the U.S. Federal Reserve has started to taper its bond purchases. The trick is finding dividend stocks that have bucked this trend and have a solid track record.
That’s why Argus Research, in a Jan. 24 report, recommends focusing on dividend growth and not just the current dividend yield. “Specifically, we would focus on persistent dividend growers – companies that have boosted their dividend for many years consecutively – and companies that have an above average rate of dividend growth,” Argus said.
One possible solution for investors is to let portfolio managers pick dividend stocks for them.
Portfolios on the Covestor platform that incorporate dividends into their strategies include Dividend Portfolio manged by Analytic Investment, Dividend and Growth Portfolio managed by Timberline Investment Management, Dividend and Income Plus Portfolio managed by 401 Advisor, Dividend Growth Portfolio managed by Sizemore Capital, Sustainable Dividend Growth Portfolio managed by Hrvoje Sajkovic, High Dividend Low Volatility Portfolio managed by LakeView Asset Management, Domestic Dividend Portfolio managed by Harvest Financial Partners, Dividend Paying Large Caps Portfolio managed by Libardo Lambrano, Net Payout Yields Portfolio managed by Stone Fox Capital and Buyback Income Index Portfolio managed by David Fried.
Photo Credit: SalFalko
The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Dividends reflect past performance and there is no guarantee they will continue to be paid. Share buyback programs are typically temporary and should not be relied upon in the long term. Past performance is no guarantee of future results.