Displaying items by tag: dividend growth
Everyone has heard of the “Dogs of the Dow”, or the strategy of buying the laggards of the Dow. It is has been of the few highly successful value-based strategies over the last decade. If you have liked the Dogs of the Dow approach then check out “Fast Dogs”, which could be a good strategy. The idea is to buy the ten stocks with the fastest dividend growth in the Dow. The strategy has performed well in the last three years and just edged out the S&P 500’s performance (it is hard to track it further because dividend growth rate data is historically spotty). What will likely make this strategy successful is that companies with rising dividend growth are naturally signaling improvement and a brighter future, so an increasingly optimistic outlook is de facto. And of course, investors love dividends.
FINSUM: We like this idea. It would probably work better in rising rate markets, but generally speaking it seems like a smart approach in any environment.
If you are looking for dividends in this low rate world, you still have some good options. What about dividend growth stocks? They can be a nice investment in a low rate market, but where to look? Healthcare and tech stocks look like a great place. Analysts think dividends in those sectors will rise 10% and 9% respectively, handily outperforming dividend-focused sectors like utilities and REITs. Healthcare looks particularly healthy. Check out Abbvie (5.3% yield), Gilead 3.9%), Pfizer (3.9%), and Eli Lilly (2.2%).
FINSUM: Profits in healthcare have been ballooning and executives seem to be quite focused on returning money to shareholders.
Dividends hold an interesting place in the current market environment. On the one hand, their yields are looking more attractive after the big fall in bond yields. However, some think the bond rally is very fragile and that it will either fall in a big way or at least stall, in which case the outlook for dividend stocks is bleak. So how to handle the environment? One tip is to buy dividend stocks with the fastest dividend growth, not the highest yield, as they have been fairing the best and will likely be the most resistant to rate fluctuations. One research analyst in the space summarized the situation this way, saying “Companies exhibiting stronger earnings growth to support regular dividend hikes have been in greater demand than those more value-oriented ones offering higher income streams”.
FINSUM: Those with the best trending yields will likely be more defensible than those with higher but more stagnant yields.
One of the biggest mistakes that investors might make in this rising rate era is to try to combat rising rates with better yielding bonds. While that strategy can work, especially in short-term bonds with high yields (such as junk bonds), a better strategy is to buy dividend growth stocks. Historically speaking, dividend growth shares have performed well in periods of rising rates, outperforming yield stocks and the broader market. BMO Capital Markets recently put out a piece on the topic, saying that “We prefer to focus on stocks that combine dividend growth and yield characteristics”. Some stocks that meet dividend growth criteria are BlackRock, Bank of America, Union Pacific, and Delta Airlines.
FINSUM: Dividend growth stocks tend to have good capital appreciation during periods of rising rates, which makes them seem like a good bet for this tightening cycle.
Here is a proposition. What if you could have stocks in your portfolio that help you earn income, combat rising rates, and support you during a recession. Look no further than this group of rising dividends stocks that should perform very well in a recession. All three are medical device makers with wide moats and long growth runways that shouldn’t be thrown off path by an economic downturn. The three are Johnson & Johnson, Medtronic, and LeMaitre Vascular. The first two companies are aristocrats and have increased their dividends steadily for over 40 years.
FINSUM: These are interesting choices. Medical device makers do some like good recession-time bets because healthcare demand should hold up nicely in any downturn.