How To Find The Best Dividend-Paying Stocks

Dividend stocks, perennially disparaged as stodgy, are an often-overlooked gem. In terms of market-beating performance, they haven’t been impressive lately, with the ascension of largely dividend-free Big Tech. But historically they have delivered.

 A good way to look at them is via a list called the S&P 500 Dividend Aristocrats. The entire S&P 500’s average dividend yield is 1.57% (and the yield on a 10-year Treasury just jumped to 1.5%). But the yield for the Aristocrats, as reflected by the exchange-traded fund that tracks them, the ProShares S&P 500 Dividend Aristocrats, is 2.14%.

So if you want to beat the market’s payout and do so sustainably—that is, to be sure the listed companies have ample cash to keep paying the dividend, as well as to enlarge it—a solid dividend-oriented strategy makes sense. You can use go with an ETF like the ProShares one. 

Or use the Aristocrats list to pinpoint individual stocks, paying higher than the overall Aristo collection. Asset manager Franklin Resources

BEN
, for instance, sports a 4% yield. Drug maker AbbVie

ABBV
pays 4.8%. Manufacturer 3M

MMM
, 3.3%.

Some wonder whether Aristo list member ExxonMobil, which pays a nice 6.3% yield, will be able to maintain its dividend level. The oil giant slipped into the red last year. Petroleum price are on the rise, however, and perhaps the fears aere unfounded.

Another dividend-centric tactic is to find a money manager that makes its own dividend-champ list. Example: Conning, the institutional investment manager, screens dividend-paying stocks from a fixed-income perspective. That is, they do a credit analysis of a stock to measure the durability of its cash flow (which after all is the key to paying a dividend).

Conning also avoids utilities, which are regulated and can’t easily raise dividends. Ditto for real estate investment trusts, also due to their limited ability to hike payouts. REITs are required to distribute 95% of profits to investors. “That doesn’t give them much room to raise” dividends, said Don Townswick, Conning’s director of equity strategies. Over the past 10 years, Conning’s program has returned 13.67%, outpacing the MSCI USA High Dividend Yield Index by 1.38 percentage points.

Market performance-wise, how do the Aristocrats do versus the larger S&P 500? Historically, the Aristos come out ahead: outperforming in down markets—in 2008, they fell 22%, while the S&P 500 plummeted 27%—and slipping behind a bit in bull runs, like the one we’ve been having (Thursday’s market being an exception, maybe).

The bull market in recent years demonstrates all this. The Aristocrat-tracking ProShares ETF thus far in 2021 has logged a 3.6% advance through Wednesday, and an annual 11.4% over three years. That lags behind the major ETF reflecting the whole benchmark index, the SPDR S&P 500, at 4.8% in 2021 ans 14.7% for the three-year span.

What this shows is that Big Tech stocks, such as Amazon and Facebook, have romped in recent years. And they’ve been responsible for a big chunk of the market’s gains. Plus, too few of them pay dividends.

Meanwhile, the Dividend Aristocrats have a 12.8% standard deviation over the past 10 years, versus the S&P 500’s 13.4%. In other words, the Aristos are less risky than the index, because their volatility is lower.

Dividend stocks “have had a tough environment in the last five years,” Conning’s Townswick said. Long-term, though, “they’re a good place to be.”

Published at Thu, 25 Feb 2021 21:58:27 +0000

By Editor