Sorry, Yogi, it ain’t déjà vu all over again nor is it Bill Murray’s “Groundhog Day.” Truth is, it’s not too far from either.
In January 2009, we wrote that our list of undervalued stocks was the longest it had ever been in my 40-plus years of investing. Although our current list is not as long as it was then, there is an area of the market that is vying for runner-up.
No investing style, industry or sector stays forever at the top of the performance list.
Sometimes referred to as “rotation,” money moves from value to growth, from small to mid to large caps, from consumer discretionary companies to heavy industrials, etc.
Throughout time, all these get their turn in the spotlight, but that spotlight does not shine on them forever.
So it is with the dividend-paying stocks we have written about several times. No, they’re not in the spotlight – they’re waiting in the wings to go on. Long out of favor and considered an “old-fashioned” way to invest, the public is becoming aware that dividends can be an important part of an investor’s total return.
No, those companies that pay attractive dividends are not very exciting. Unlike watching a tech stock race up, there’s little, if any, Adrenalin rush when your account gets credited with a dividend.
But there among the victims of a market correction often rest the dividend-paying bargains.
Frequently overlooked until a near panic stage is reached in the markets and negativity hangs heavy in the investing air, they churn out payments from their earnings, rewarding serious, patient investors.
With the 30-year Treasury below 3 percent – a befuddling fact in light of government’s huge spending binge – and certificate of deposit rates providing a pittance of an income for those needing the cash flow for expenses, what better place to look for income than the likes of a Verizon, Altria or Kraft, for instance?
It is times like these, when even good news gets a negative spin, that values are ripe for the picking.
There are several additional benefits of owning issues that pay attractive dividends. There is the downside protection aspect, as dividend yields can provide support for an issue’s price during declining and/or uncertain markets. There’s the growth in the dividend provided by many solid companies, thereby increasing the investor’s cash flow with each bump-up in the rate.
But not all dividend-paying stocks are equal, so here are a few caveats. The higher the dividend as a percent of a company’s earnings, the less likely that increases will come regularly and the greater the vulnerability to a cut in the dividend should that company’s business decline. Better to avoid those companies with payouts from earnings in the 85 percent to 90 percent range.
A high dividend yield often reflects the market’s concern with the company’s business, so use caution and do your research when you see a yield that looks too good to be true.
Real estate investment trusts and limited partnerships can provide extraordinary cash flow from what are often termed dividends, but which incur special accounting treatments for return of principal and/or depreciation. Know the tax consequences of these before investing in them.
Last month, we discussed preferred stocks, another source of rates higher than CDs or Treasurys. They rank above common stocks in a bankruptcy, providing an additional level of protection, but have the disadvantage of not increasing their dividend – with the exception of a few floating rate issues.
Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]
