The stock market may still be trading off the Federal Reserve, but with a market right at its high, the best dividend-paying stocks can help mitigate investment risk.
Because the monetary stimulus has been so significant for a number of years now, stocks never really experienced a material price correction. This can be a healthy development in a bull market.
Even if the next interest rate hike is pushed out to next year, the cycle is going to change. And that’s going to make it more difficult to make money with stocks.
Why the Best Dividend-Paying Stocks Are the Key to This Market
In a slow-growth world on the cusp of a new interest rate cycle, dividends may just be the only return equity investors get.
One of the many things that occurred right after the financial crisis was that corporations got even tighter with their money. The results were much-improved balance sheets and a great unwillingness to invest in new business ventures and new employees.
It became much easier for companies to simply increase their dividends and repurchase shares to keep shareholders happy. It’s a trend that I think has many more years to play out.
Conservative stocks like Johnson & Johnson (NYSE/JNJ), 3M Company (NYSE/MMM), The Walt Disney Company (NYSE/DIS) and Wells Fargo & Company (NYSE/WFC) soared the last several years because they offered the rising dividends and earnings predictability that institutional investors craved.
Among many examples of dividend-paying stocks also providing very good capital gains, they are the market’s existing winners and their prospects for investors remain good.
Top Two Dividend Stocks with Great Income & Capital Gain Potential
Kinder Morgan, Inc. (NYSE/KMI)
In these pages, I’ve written quite a lot about Kinder Morgan, Inc. (NYSE/KMI) and its solid prospects for the rest of this decade. It’s obviously a favorite stock to watch. Its dividend yield is approximately 4.5%.
Oil prices are in correction; but this will change. With domestic supply still burgeoning for both oil and natural gas, a company with a strong pipeline business—like Kinder Morgan—is very well positioned.
Kinder Morgan has good potential to surprise investors with divestitures and/or spin-offs as the company digests its recent corporate reorganization. (See “Oil Prices: Where They’re Going and How to Profit From Them.”)
I wouldn’t be surprised at all if management boosts its dividends at a greater rate than already stated.
Apple Inc. (NASDAQ/AAPL)
Another stock with good potential in a slow-growth environment, both for capital gains and income, is Apple Inc. (NASDAQ/AAPL). This is a dividend-paying stock that can easily afford a greater payout ratio.
With strong brand loyalty and continued rising earnings estimates, Apple has further legs in this market. This fiscal year should be particularly strong for the company.
A Smart Profit Strategy for this Market: Dividend Reinvestment
I feel that investment risk in equities is very high currently, simply because the market has already gone up tremendously on the back of very modest economic growth.
I like stocks that pay dividends for investors who are buying in this market. And if income isn’t required, then dividend reinvestment is a great way to build a position in a good business over time.