History shows that dividends have been a powerful source of total return in an investment portfolio. Since 1926, they have represented over 50% of the total market return.
Presently, even as benchmarks hit fresh milestones again and again, investors favor dividend stocks.
That's part of the reason Goldman Sachs Group (NYSE: GS) raised its year-end target for the S&P 500 to 1,750, up from 1,575.
Goldman's chief equity strategist David Kosten explained he expects higher-than-expected dividends from S&P 500 companies to attract income-seeking investors to stocks. He cited the current low-interest rate environment "which helps dividends and stocks more generally" for the upped target.
Notably, companies paying rich dividends have fared best.
Since 2009, the highest yielding stocks (with an average yield of 6.0%) turned in a monthly average return 0.23% above the S&P 500 Index, while the lowest yielding stocks averaged a monthly return of 0.56% below the S&P.
The lowest yielding group (with an average of 0.8%) even performed poorer than those that paid no dividends at all.
But like we've warned before, this doesn't mean just any dividend stock will do...
Dividend Stocks: It Pays to Be Choosy
Given the plethora of choices, investors must be selective. Simply chasing yield is never prudent.
Here are ten things to look for when investing in dividend stocks:
- A long dividend history
- Has a worldwide market presence (providing somewhat of an inflationary hedge)
- A stable product or service
- Sticks to its core business
- A "current ratio" (the ratio of current assets to current liabilities which measures its ability to meet short term obligation) greater than 1
- Stock price stability
- A history of share buybacks
- A history of hiking its dividend
- A payout ratio no more than 80% of its earnings per share
S&P Dividend Aristocrats
For dividend stock choices, the S&P 500 Dividend Aristocrats is an elite list of companies that meet the above stringent criteria and have a history of increased dividend payouts for 25 consecutive years.
Since the start of 2013, the S&P 500 Dividend Aristocrat Index has returned 19%, besting the 16% year-to date return for the overall S&P 500 Index.
Just comparing the 52-week low - 1,586.40 reached in June 2012 - to the 2,126.76 high hit this month - shows how investor interest is pushing dividend stocks higher.
As more money pours into dividend stocks in 2013, these stocks' share prices - and the value of the whole index - will rise.
The top ten constituents by market cap as of May 21 are:
- W.W. Granger Inc. (NYSE: GWW) yielding 1.91%
- PPG Industries Inc. (NYSE: PPG) yielding 1.52%
- Illinois Tool Works Inc (NYSE: ITW) yielding 2.13%
- AFLAC Inc (NYSE: AFL) yielding 2.48%
- Sherwin Williams Co (NYSE: SHW) yielding 1.05%
- Medtronic Inc (NYSE: MDT) yielding 2%
- Cardinal Health Inc (NYSE: CAH) yielding 2.53%
- Sigma-Aldrich Corp (Nasdaq: SIAL) yielding 1.01%
- Air Products & Chemicals Inc (NYSE: APD) yielding 2.96%
- Lowe's Cos Inc (NYSE: LOW) yielding 1.49%
Related Articles:
- Money Morning:
My New Favorite Way to Make Killer Income - Money Morning:
3 Overseas Choices for Yield Starved Investors - S&P Dow Jones Indices:
S&P 500 Dividend Aristocrats - MSN Money:
The absolute best dividend stocks in America - CNBC:
2013 Dividend Plays - FactSet:
Accelerated payments push DPS for S&P 500 companies to new highs
Diane Alter 24 May, 2013
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Source: http://feeds.moneymorning.com/~r/moneymorning/jOLe/~3/tJQdJspjNSE/
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