An article in The Street caught our eye. These 5 Big Dividend Stocks Want to Pay You More Money. It got us to thinking about how to pick dividend stocks.
When stocks go sideways, dividends matter.
For instance, the $1.3 billion ProShares S&P 500 Dividend Aristocrats ETF (NOBL) , which owns large, consistent dividend payers, is up 3.4% so far since the calendar flipped to January. If NOBL’s performance were to keep up at that pace, investors are looking at a 17.8% rate of return in 2016.
And that’s not an uncommon occurrence, either. According to research from Morgan Stanley, dividends have contributed more than 41% of the stock market’s total returns over the last eight decades.
But, as the article points out, to get the biggest benefit you need to learn how to pick dividend stocks. You need to consider not just the current dividend yield but also what that yield is likely to be in the years to come. And while nothing guarantees a dividend payment next quarter a solid balance sheet, a history of paying dividends and a history of steadily increasing dividends over the years are important. And there is the matter of dividend yield versus interest rates.
Dividend Stocks as an Alternative to Bonds
In our article last year about What to Look for in a Dividend Stock we looked at dividends and interest rates.
Dividend stocks are an alternative to buying bonds. Power companies typically pay dividends that are competitive with bonds but are stable companies with little growth. Their share prices rise and fall inversely to interest rates. That is because the company has a fairly stable dividend that does not go up when interest rates go up. So, the stock price falls as rates rise. The New York Times reports on how rising long term interest rates are depressing the market.
An increase in long-term interest rates rattled investors on Tuesday, nudging major United States stock indexes lower for the second day in a row.
Traders around the world have been selling off government bonds in recent weeks. That trend accelerated on Tuesday, bringing down bond prices and, in turn, driving up the benchmark United States bond yield to its highest level since late November.
The point is that when rates go up stocks, and especially dividend stocks go down. Ideally what to look for in a dividend stock is a company that will thrive when rates go up, such as a bank. Or, simply wait until rates go up and purchase the dividend stock when it is cheap. How to pick dividend stocks for the long haul is to buy when interest rates are high and the stock is cheap. The dividend will likely remain the same as interest rates fall and the stock price will appreciate.
Another short term concern for buyers is when dividends are paid. The price of the stock should reflect whether or not you will receive the dividend of if the seller will pocket the dividend along with your payment for the stock.