I still feel that dividend-paying stocks have the edge going forward. The stock market has already gone up tremendously and there’s no reason why it shouldn’t experience a material price correction.
At the beginning of 2013, investors threw caution to the wind and just started buying stocks after two years of price consolidation.
Investors chased the market’s safest names—safe in terms of earnings reliability and the certainty of quarterly dividends.
Among blue chips, the market’s existing winners did exceedingly well for such mature businesses. And dividend payouts have been on the upswing.
Why Dividend-Paying Stocks Still Have an Edge
The financial crisis galvanized a period of corporate risk reduction and austerity. We’re still not seeing multi-industry new investments in plants, equipment, or employees. Instead, companies are returning excess cash to shareholders and they are buying back shares to pay for it.
Typically, in a rising interest rate environment, dividend-paying stocks come under pressure. But rates have been so low that there’s plenty of room for them to rise modestly without the cost of capital becoming detrimental.
We actually saw many utility stocks sell off right after the Federal Reserve made its intention to raise interest rates soon clear. Utility stocks are typically higher dividend-paying stocks.
But there is still a real fragility to this equity market. The reflation of financial assets has worked to a point, but it hasn’t trickled down through Main Street.
Accordingly, I believe big investors will still pay up for earnings reliability and rising dividends. The market’s existing winners continue to look good.
Stocks That Big Investors Still Like
Most equity portfolios would be well-served with exposure to the pharmaceutical industry. Abbott Laboratories (NYSE/ABT) has been consistently increasing its dividends the last several years and its share price appreciation has been remarkably steady.
Payroll company Automatic Data Processing, Inc. (NASDAQ/ADP) is another existing winner, with both earnings and dividend momentum.
3M Company (NYSE/MMM) has held up extremely well and earnings growth is expected to accelerate by low double digits next year.
The Walt Disney Company (NYSE/DIS) and Nike, Inc. (NYSE/NKE) look to have continued good prospects as well. These are the kind of positions that can anchor a long-term portfolio with automatic dividend reinvestment. (See “Stock Market Investing in a Market About to Turn; What Kind of Stocks Should You Look at?”)
For years now, many large-cap companies have been unwilling to spend their large cash hoards (repatriating cash has severe tax consequences). It’s just easier to return excess capital to shareholders.
But corporate austerity is a double-edged sword. Without vision and bold new investments, large companies can’t grow at a rate greater than the general economy can provide. It’s what we need for a new business cycle to really take hold.
Near term, I continue to like the market’s existing dividend-paying winners for investment-grade portfolios.
And it’s not just about expected return including dividends; it’s also about investment risk for a market that’s already gone up and an interest rate cycle that’s about to change.