No lie – These stocks pay you to own them
If you’re following the lead of many Wall Street investors — including portfolio managers, equity strategists, investment managers, and other experts — then you might want to consider adding dividend-paying stocks to your wallet.
A decent CNBC survey of 500 Wall Street investors found that 42% are most likely to buy dividend-paying stocks right now, given the market’s sluggishness. It was by far the largest of all investment types, as mega-cap tech stocks held second place at 18%, followed by financials at 16%.
Why dividend stocks and why now? For starters, in a market down about 13% year-to-date, these are stocks that pay you to own them.
What are dividend stocks?
Dividend stocks are those that distribute a quarterly, or sometimes monthly, payment or dividend to investors. Most dividend payers are large, established companies with a solid earnings history because dividends are paid out of a company’s earnings. Not all large companies pay dividends; about 400 of S&P500 shares distribute them. But the percentage is much lower among mid and small cap stocks.
And of these dividend-paying stocks, not all offer great yields — that is, the percentage of a company’s stock price that it pays out in dividends each year. The average dividend yield on the S&P 500 is currently around 1.69% – so anything above that number would be considered pretty good. A dividend yield above 3% is generally considered a fairly high dividend.
Currently, many banks pay high dividends, including Citigroup, which has a yield of 3.98%. A yield of 3.98% translates into a dividend of $0.51 per share each quarter, based on the current share price of $51. If you own 50 shares of Citigroup, this dividend would translate into a dividend payment of $25.50 per quarter. For a full year, a dividend of $0.51 per quarter would amount to $2.04 per share per year. So if you owned 50 stocks, you would have $102 per year in dividend payments.
Now you can take that money and put it in your bank account, or you can reinvest it in the stock, increasing your position.
Monitor the payout ratio
In addition to yield, you also want to monitor the payout ratio. The payout ratio is the percentage of profits that goes towards the dividend. As an investor, you want to look for a dividend with a payout ratio that is, ideally, less than 50%. If the company has too high a payout ratio, say over 60%, it may be too difficult to pay the dividend. This could cause the payment to be unsustainable or cause the business to sacrifice other investments, which could hurt its growth. This is often called a dividend trap.
Generally speaking, a payout ratio between 25% and 50% is pretty good, but it really depends on the company. And then there are some companies – namely real estate investment trusts (REITs) and business development companies (BDCs) – that are required by law to pay out 90% of their profits in dividends, so consider investing in these types of companies.
Also, a good way to identify a company that is committed to maintaining its dividend is how long it has increased its annual dividend. Those who have increased their annual dividends for 25 or more consecutive years and meet the other requirements of the S&P Dow indices are called Dividend Aristocrats, while those who have done so for 50 or more consecutive years are called Dividend Kings. Coca Colafor example, would be considered the latter because it has increased its dividend for 60 consecutive years.
Why dividend stocks are popular right now
Investors tend to flock to dividend-paying stocks in bear or down markets for several reasons. First, they are generally stable blue chip companies that have been around for a long time, are well capitalized and have weathered recessions and downturns in the past. The market downturn is driving down their valuations and making them an attractive buy for many investors.
In addition, the dividend, if reinvested in the stock, can increase its total return. Since 1930, dividends have accounted for 40% of the total return of the S&P 500, according to analysis by Fidelity Investments. But this percentage increases during difficult markets. In the 1970s, for example, when the market was down, the economy was collapsing, and inflation was high, dividends made up about 71% of the total return of the S&P 500. Conversely, during the bull market of the 2010s, they were only 16%.
Or, of course, you can take the quarterly distributions and save them or use them as pocket money. Either way, these are stocks that pay you to own them.