As I pointed out at the beginning and middle of 2008, dividend-paying stocks make the best bear-market investments.
The reasons are simple:
- Dividend yields rise as stock prices drop.
- Companies that have the quarterly obligation to pay dividends to shareholders tend to be more financially able to withstand difficult times.
But as I pointed out in February, it's important for investors to invest in only the strongest dividend-paying companies -- in other words, companies with realistic payout ratios.
Was this smart advice?
It's true, I probably would have shied away from writing a follow-up column if I had screwed up ... but I didn't.
From the market's bottom on March 9 to market close yesterday, dividend-paying stocks -- as tracked by the iShares Dow Jones Select Dividend ETF -- are outpacing the S&P 500 by a respectable margin: 47.6% to 45.5%
That's good news for investors who were fortunate enough to buy at the perfect entry point.
It's not bad news for everyone else
See, despite that almost-50% run-up, today is still a perfect time to get in on dividend-paying stocks.
Why?
Despite the run-up, many strong stocks are still yielding more than their five-year average -- but not because their underlying businesses are on the rocks. No, these high yields exist purely because the stock's price is still depressed.
Just take a look at these blue chips and their attractive yields. All of these companies have increased their dividend payments over those five years (an excellent sign of health).
|
Company |
5-Year Average |
Current |
5-Year Average Growth Rate
|
|---|---|---|---|
|
Wal-Mart |
1.5% |
2.2% |
17.7% |
|
ExxonMobil |
1.8% |
2.5% |
9.0% |
|
Intel |
1.9% |
3.0% |
30.9% |
|
Procter & Gamble |
2.0% |
3.4% |
11.2% |
|
PepsiCo |
1.9% |
3.2% |
17.5% |
|
Coca-Cola |
2.7% |
3.3% |
8.0% |
|
Chevron |
2.9% |
4.0% |
11.8% |
Data from DividendInvestor.com.
Cashing in today
So regardless of whether the market has completely bottomed or we're just enjoying a brief upward spike (no one can quite be sure!), you'd do well to buy strong dividend-paying stocks while their prices are relatively low and they can still boast such historically high yields.
After all, you'd hate to end up missing out on the next short-term movement up, or -- even worse -- the long-term trend that dividend-paying stocks have of outperforming.
Here at the Fool, Motley Fool Income Investor advisor James Early and his team scour the market every month for a new dividend stock idea -- and right now they're finding plenty. His team also has six core stock recommendations, all of which boast a long history of paying out dividends to shareholders and outperforming the market.
What's more, one of those stocks is on the list of blue chips above, and you can see which completely free. Find out which stock made the cut and see the team's top dividend pick for right now by clicking here.
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Adam J. Wiederman always takes note of investing trends and acts accordingly. He owns no shares of the companies mentioned above. The Motley Fool owns shares of Procter & Gamble. Intel, Coca-Cola and Wal-Mart are Motley Fool Inside Value recommendations. Coca-Cola, PepsiCo, and Procter & Gamble are Income Investor recommendations. The Motley Fool's disclosure policy is trendy.
