Bottom Line/Personal: If you’re an investor and you own dividend-paying stocks, then you’ve got cash coming in no matter what the market is doing. On the other hand, dividend-paying stocks don’t tend to gain value as quickly as other types of stocks. So how do you choose the best dividend-paying stocks?
I’m Steven Kaye, editorial director of Bottom Line Publications, and this is Bottom Line On Your Money, where our experts help you create, invest and protect your wealth.
Today I’m speaking with Vahan Janjigian, PhD, CFA. Vahan is editor of the MoneyMasters Stock Report newsletter, chief investment officer at Greenwich Wealth Management and author of two books, including Even Buffett Isn’t Perfect. Vahan previously served as editor of the Forbes Special Situation Survey newsletter, where he was ranked the number-one stock picker by Hulbert Interactive for the decade ending in December 2012.
Vahan, how do you pick the best dividend paying stocks?
Vahan Janjigian, PhD, CFA: Good question, Steve. If you look at the long term, you should expect to get somewhere between 8% and 10% annually from your stock portfolio, and approximately two percentage points of that total return is going to come from dividends. Dividends are a very important component of that total return.
The next question is, are there times when it is better to have dividend-paying stocks? And the answer to that is also yes. The academic research indicates that dividend-paying stocks do best in markets that are either going up very moderately…markets that are flat…or markets that are going down. These stocks tend to outperform the non-dividend-paying stocks. But when you’re in a strong bull market, it’s the non-dividend-paying growth stocks that tend to outperform.
Most of the time, however, you want to have dividend-paying stocks in your portfolio, so how do you find them? Well, it’s relatively easy to use many of the tools available on the Internet today to screen for dividend-paying stocks, but you shouldn’t buy a stock simply because it pays a dividend. There are a couple of other factors to consider.
You want to see some evidence that the dividends have been growing over time and the company can continue growing that dividend over time. The ability to grow that dividend, in my opinion, is much more important than the actual yield. The dividend yield of a stock can actually go up quite a bit if the company is having problems and the stock price is falling, but that raises the question—is that dividend sustainable?
So you want to make sure the dividend is sustainable…you want to make sure that the company is going to be able to grow the dividend over time. These are very important factors when you’re picking dividend-paying stocks.
Bottom Line: So as an investor, I have my choice—I can go for a dividend-paying stock whose price has fallen and therefore the dividend has come up, and I’m immediately getting more cash back…or I can look at a stock whose price may have done better lately, the dividend is lower, but it might be a stronger company. Is that the choice I have to make?
Janjigian: It’s one of the choices you have to make, and in my opinion, the better choice is to pick the stock that is going to be able to grow the dividend over time, even if the current yield is less. Because if that dividend is growing over time, the stock price will also be going up over time, and your yield is going to be based on the current dividend divided by what you actually paid for the stock some time ago. So you could end up actually getting quite a good yield.
Bottom Line: In today’s low interest rate environment, what kinds of yields are companies that fit that profile paying?
Janjigian: There are lots of companies that I’m finding that pay dividends that have yields anywhere from, like, 1% or 3% or even 4% that are good, sound companies.
And as you mentioned, we have incredibly low interest rates today, and these dividend-paying stocks have actually become a substitute for bonds. When you have a situation where the 10-year Treasury is yielding only 2.5%, sometimes even less, you would be much better off buying stocks that are paying dividends of about 2.5% and have the ability to grow that dividend over time.
Bottom Line: A lot of investors don’t mind taking a chance on a stock that’s a little bit speculative, maybe a company that has fallen onto some kind of hard times, and you can combine that with the fact that if the price has fallen, the yield may be way up there. Aren’t there stocks available now paying 5%, 5.5%, 6% in dividend yields? And if you don’t mind the risk from the stock anyway, why not go for those?
Janjigian: There are stocks like that, but there are also stocks that have decent yields that are not as speculative. One stock I really like, for example, is Verizon, ticker symbol VZ. That has a very generous yield. It has a very strong business model, and it’s a company that should be able to grow the dividend over time. I’d rather go for something like that than a beaten-down company that might be running into trouble but has a very high yield.
Bottom Line: Can an investor put together a portfolio of a reasonable number of stocks like Verizon that have strong businesses and yet unusually strong yields?
Janjigian: Only if they subscribe to my newsletter.
Bottom Line: Ah, very good point. Thank you, Vahan, for telling us about buying dividend-paying stocks.
Janjigian: Thank you, Steve.
