It's true. I probably would have shied away from writing a follow-up column if I had screwed up ... but I didn't.
As I pointed out at the beginning and the 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 buy shares of the strongest dividend-paying companies -- in other words, companies with realistic payout ratios.
Sound advice indeed
Lo and behold, from the market's bottom on March 9 through yesterday's close, dividend-paying stocks -- as tracked by the iShares Dow Jones Select Dividend ETF -- are outpacing the S&P 500 by 57.4% to 55.9%.
That's pretty good news for investors who were fortunate enough to heed my advice and buy at the perfect entry point.
It's actually not bad news for everyone else
See, despite that 57% run-up, today is still a perfect time to get in on dividend-paying stocks.
Why?
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 large caps 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
|
|---|---|---|---|
|
Best Buy |
1.0% |
1.4% |
12.4% |
|
Williams Companies |
1.4% |
2.2% |
47.7% |
|
Valero |
1.0% |
3.1% |
37.5% |
|
Automatic Data Processing |
2.2% |
3.3% |
25.0% |
|
McDonald's |
2.2% |
3.9% |
32.1% |
|
DuPont |
3.9% |
4.9% |
3.2% |
|
Verizon |
4.5% |
6.5% |
2.8% |
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 new dividend stock ideas -- and right now they're finding many.
In addition to these new recommendations, the Income Investor team has compiled a "best in class" group of six core dividend stock recommendations, each of which boasts a long history of paying out dividends to shareholders and outperforming the market.
Find out which stocks made the cut, along with the team's top dividend pick for this month, by clicking here.
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This article was originally published Aug. 12, 2009. It has been updated.
Adam J. Wiederman always takes note of investing trends and acts accordingly, but owns no shares of the companies above. The Motley Fool owns shares of Best Buy, which is both a Motley Fool Stock Advisor and Inside Value recommendation. Automatic Data Processing is an Income Investor recommendation. The Motley Fool's disclosure policy is trendy.
