Dividend-Paying Stocks: Why They’re an Integral Part of Your Portfolio

Dividend-Paying StocksIn my previous commentary, I talked about high-flying IPOs like Shake Shack Inc. (NYSE/SHAK) and their vulnerability to the downside. Now I’m going to swing to the other end of the investment spectrum with the dividend-paying stocks that tend to deliver consistent results and pay a dividend over the long term. Here you are not going to find the momentum trades, but stocks that actually trade at reasonable multiples to their growth.

A look at the stock market performance this year shows technology and small-cap stocks leading the way. At the bottom are the dividend stocks comprising the Dow Jones Industrial Average. For those of you newer to the investing world, these are the older-established companies that your parents would have invested in. No Facebook, Inc. (NASDAQ/FB), Netflix, Inc. (NASDAQ/NFLX) or Google Inc. (NASDAQ/GOOG). You will, however, find Apple Inc. (NASDAQ/AAPL) as a recent addition to the list.

The Dow has been a laggard this year; as was the case in 2014 and generally is when the stock market is rising. “Who wants these old economy stocks,” a newer investment might wonder. However, I’m here to tell you that they are worth a look even if you are fairly new to the investment game.

Why Dividend-Paying Stocks Now?

While technology and growth will generally offer you the top risk-to-reward returns, you really shouldn’t be fully invested in this segment. Just ask the speculators in 2000 who were all-in on Internet-related stocks. Many of the high-flying companies back then have since dissipated.

My thinking is you also need to have some dividend stocks that provide a balance to your portfolio as far as risk goes.

I can hear you thinking, “Why invest in the likes of The Proctor & Gamble Company (NYSE/PG) and Colgate-Palmolive Co. (NYSE/CL)? These are boring companies.” However, while these stocks may not be as exciting as the technology and Internet plays, they are also much more reasonably priced. Moreover, we know they will still be around decades from now.

Just look around your house and you’ll find that many of your daily products are made by PG and Colgate. The thing is, these companies actually have a solid financial history.

While the Dow contains what are considered solid companies, keep in mind that all companies can and will generally go through a period of difficulty in their history. The key is that they manage to adjust and recover after periodic setbacks due to their solid foundation and large size.

Opportunities in “Dogs of the Dow”

A Dow component that is currently trying to find itself is McDonald’s Corp. (NYSE/MCD). With the rise of competition in the fast food restaurant space, McDonald’s has struggled with growth. Yet, this is not the first time the company has been forced to change its game plan and adapt to the new industry conditions. In the 90s, McDonald’s was trading at the $20.00 range as the shift to healthier foods impacted the company. The company was able to refocus on a healthier menu and is now trading five times higher. McDonald’s is again being forced to refocus in light of rising competition from the likes of ChipotleMexican Grill, Inc. (NYSE/CMG), which I consider the best of breed.

In addition to McDonald’s, there are other Dow companies currently facing some issues that could provide an investment opportunity.

Simply look at the “Dogs of the Dow,” comprised of the highest dividend-yielding Dow stocks that have seen their share prices weakened.

The top eight “Dogs” as of May 15 include:

AT&T. Inc. (NYSE/T)5.51%

Verizon Communications Inc. (NYSE/VZ) 4.40%

Chevron Corporation (NYSE/CVX) 3.99%

McDonald’s Corp. (NYSE/MCD) 3.48%

General Electric Company (NYSE/GE) 3.36%

Pfizer Inc. (NYSE/PFE) 3.30%

Caterpillar Inc. (NYSE/CAT) 3.16%

Merck & Co. Inc. (NYSE/MRK) 3.01%

I know many of these companies aren’t as attractive as Facebook, but you are also not paying a huge premium to buy them.