Realistically, for a stock market that’s already gone up with big sovereign debt problems in most Western economies, as well as an upcoming change in the interest rate cycle, dividend-paying stocks may be the only returns available from equities.
I find it difficult to envision capital gains from the broader market near-term. A lot will depend on corporate earnings. So far, they haven’t been great. And it’s not just the stronger U.S. dollar holding the numbers back; there’s just little in the way of genuine economic growth out there.
It’s also the traditional slow time for equities. What the current environment does present is a good opportunity to evaluate your investment risk. This is a market that hasn’t really experienced a material price correction in a number of years.
Dividend-Paying Stocks for Weathering a Stormy Market
There’s a good amount of investment risk in the world—and that’s on top of a stock market that’s already gone up. Equities could easily experience a 20% haircut in prices alone on their capital gains over the next several years.
In a directionless market with declining expectations for corporate earnings growth this year, not only is dividend income important in terms of the income it provides, but also to help mitigate overall portfolio risk. Dividend-paying stocks are typically larger-cap, more blue chip businesses.
Over the last few years, dividend payments have gone up substantially at large brand-name corporations. This is largely because they preferred to return excess cash in that form, rather than many bold new investments in plants, equipment, and employees.
Pipelines and Coatings: Two Great Businesses with Strong Dividend Prospects
Kinder Morgan, Inc. (NYSE/KMI)
The turmoil related to Greece’s sovereign debt issues and China’s recent equity market reversal has not only affected domestic stock market sentiment, but even oil prices sold off on these worries.
While the price of oil and natural gas may be subdued for a considerable period of time, I like Kinder Morgan, Inc. (NYSE/KMI) both for its strong pipeline business and its deliberate, rising dividends for the next several years.
With a yield of right around five percent, this is attractive in today’s market. And company management is on plan to keep increasing its annual dividends for the rest of this decade.
Certainly, higher oil prices would be helpful to a business like Kinder Morgan’s. But the recent breakdown in energy prices is actually an opportunity for what was up until recently an expensively priced energy sector.
3M Company (NYSE/MMM)
3M Company (NYSE/MMM) might seem like a stagnant blue-chip, but it still has good earnings growth momentum in a world where a lot of other multinationals are struggling.
The stock’s been flat since last November, but it did have a material run-up in addition to increasing its dividends to shareholders. (See “Stock Market Investing When Everything’s Already Gone Up.”)
Wall Street sales and earnings expectations for 3M are quite robust for 2016. This year’s revenues should be flat, but earnings per share are still expected to grow to mid-single digits over 2014. Combined with the company’s dividends, it’s a fair return in this environment of sluggish growth.
While there are a lot of known certainties in this market, equity investment risk remains high, so I feel that select, higher-dividend-paying companies offer much better risk-adjusted return expectations in a global market that’s due for a reckoning.