Tuesday’s massive stock market meltdown should serve as a reminder to investors that in times of turmoil, it pays to own shares of companies that also pay you.
Dividend paying stocks are in vogue again, even as long-term government bond yields have surged dramatically this year. Traders seem to be craving quality blue chips that offer steady (and often growing) dividends. These can be a more exciting investment than stodgy Treasuries.
Quarterly or annual dividend payments provide good income streams for investors who need cash in the short-term. And for those playing the longer game, dividends can be reinvested to buy even more shares in those same companies.
The S&P 500 High Dividend ET is down only about 4% this year and is up slightly over the past 12 months, a much better performance than the overall market. The S&P 500 has plunged more than 17% in 2022.
The high dividend fund, as its name implies, has exposure to companies that offer big yields, such as energy giants Exxon Mobil (XOM) and Chevron (CVX). Both stocks have soared this year as oil prices have skyrocketed.
Other top holdings in the fund include Cardinal Health (CAH), Principal Financial (PFG) and tech services company Iron Mountain (IRM). All three stocks are in the green this year as well, with Cardinal Health (CAH) surging 30%.
It makes sense that dividend stocks are doing well in these tumultuous economic times. When a company pays a dividend — and continues to steadily increase it — that’s a sign of financial stability.
“Dividend payers do well in times of inflation. Many of the stocks are high quality, blue chip players with pricing power and strong balance sheets,” said Austin Graff, co-chief investment officer of Titelist Asset Management and manager of the TrueShares Low Volatility Equity Income ETF.
As such, many consumer staples firms, i.e. food and beverage giants that can be counted on for dependable sales and profit growth, tend to be top dividend stocks. Keurig Dr Pepper (KDP) and Philip Morris (PM) both announced Wednesday that they were boosting their dividends, for example.
Growth companies pay dividends, too
With more market volatility likely ahead, investors who still want stocks over bonds can keep looking to dividend payers. Even the tech sector has its fair share of dividend plays, including Apple (AAPL), Microsoft (MSFT) and Oracle (ORCL).
Graff said investors looking tor dividend stocks need to focus not just on their yields, however. Because the dividend yield is the annual payout divided by the share price, higher yielding stocks often are so-called value traps, companies with a plunging stock price.
Graff said he prefers companies with decent, although not sky-high, yields that are also steadily increasing their dividends. Investors can find businesses that are able to generate sales and earnings growth at a healthy clip.
UnitedHealth’s dividend yields 1.2%, NortonLifeLock’s yield is 2.2% and American Electric Power has a yield of 3%. So the yields are still low enough — less than the current 3.4% rate for a 10-year Treasury bond — that there is room to keep increasing the dividends even as the companies invest in their businesses to keep profits rising.
“These are not just companies with nothing better to do with their cash,” Graff said.
So it’s no longer the case that dividends are just for conservative investors or retirees on a pension or other fixed income.
“If you were asked to picture a typical dividend investor, you would probably conjure an elderly widow or widower,” Jack Ablin, chief investment officer of Cresset Capital, said in a report earlier this month. “But now that monetary policy is tightening, dividends are taking center stage again. Investors reckon that dividends offer a modicum of certainty in an otherwise uncertain investing environment.”