The Dividend Stock Recovery: Get Ready for a High-Yield Bonanza
by Alexander Green, Chief Investment Strategist
Monday, February 22, 2010: Issue #1201
It's been a tough time for income investors lately.
Ten-year Treasuries pay less than 4%. The S&P 500 yields just over 2%. Money market fund returns are microscopic, paying an average of just 0.05%. (At that rate, it will take your money one thousand years to double.)
What should you do?
Take a look not at the stock market, but inside it. The S&P 500 may yield 2.1%, but many individual stocks are yielding far more. In addition, yields are about to arch higher.
The Dividend Nosedive Is Over
In a normal year, companies announce 10 to 20 times more favorable than unfavorable dividend changes. But the last two years have been anything but normal.
The financial crisis forced many banks and other financial companies to cut or suspend dividend payments. And the credit crisis and recession led companies in many other sectors to cut back wherever they could to conserve cash.
- In 2009, for the first time in half a century, American companies announced more dividend cuts than increases. Overall, these dividend cuts cost investors $58 billion.
- On a quarterly basis, the first three months of 2009 were the worst of the cycle, with 64% of dividend announcements being negative. (That figure fell just a little short of the record 67%, set in the second quarter of 1958.)
But the worst of the recession is now over (witness Fed Chairman Bernanke's decision last week to raise the discount rate by a quarter-point to 0.75%) and the number of negative dividend decisions is already declining.
Howard Silverblatt, senior index analyst at S&P, says, "The worst is over for dividends. Standard & Poor's believes that a dividend recovery is underway."
I know, I know. An average 2.1% S&P 500 dividend yield isn't much to get excited about. But unlike fixed-rate investments, stock dividends rise over time. And sometimes they rise a lot.
Dividends Are a Long-Term Investor's Best Friend
I'll never forget the time 25 years ago when as a young stockbroker - still wet behind the ears - I suggested to a client that she sell one of her oil stocks.
"I can't sell that stock - I need the dividend," she said.
I reminded her that it was only yielding 2%.
"Son, it's yielding 2% to buyers today. My annual dividends are more than my original investment."
Two lessons here...
- When a client calls you "Son," you've almost certainly offered some bone-headed advice.
- Never mistake today's payout for a long-time investor's yield.
So if you're looking to fund a retirement 10 or 20 years out, dividends then will almost certainly be a lot higher than they are today.
Six Stocks Spitting Out Healthy Dividends
Also, if you look within the S&P 500, there are plenty of stocks with above-average dividend yields...
~ Bristol-Myers Squibb (NYSE: BMY) - 5.1%.
~ Eli Lilly (NYSE: LLY) - 5.7%.
~ Pitney-Bowes (NYSE: PBI) - 6.4%.
~ AT&T (NYSE: T) - 6.7%.
~ Altria (NYSE: MO) - 6.7%.
~ Frontier Communications (NYSE: FTR) - 13.1%.
With retirement ahead of you and the worst of the recession behind you, consider scooping up a handful of these high-dividend payers.
Five years from now, these stocks should be significantly higher. And that goes for their quarterly payouts, too.