This article will focus on the importance of adding dividend stocks to one's portfolio. Dividend paying stocks tend to outperform any other general investment class over time and usually have low betas. They especially outperform during bear markets and times of high volatility. That being said, there is downside risk as they may underperform during bull markets. This bull market has been a dramatic exception (look T, WMT, etc). However, the run-up in the market over the past year causes me to pause and think that I need to return to some safer asset classes. While I do not think a large sell-off is on the horizon, my focus is on long-term growth and stability so I largely rely on dividend payers and the funds that are comprised of such assets.
It is important to understand that not all dividend-paying companies are considered equal. One should not just look for the highest yield, as abnormally high yields usually mean that the level of dividend is not sustainable. Also, companies pay out in different ways. American companies pay their dividends quarterly while Australian companies pay their dividends semi-annually. These are just little discrepancies which investors should be aware of.
Now for my favorite stock pic: SPDR S&P Dividend (SDY) is an ETF that tracks only large cap dividend payers in the S&P 500 and DJI. Like I said, all dividends are not considered equal and can be discontinued or shrunk at any time. The SDY is my favorite because it is comprised of only companies who have raised their dividend payouts every year for the past 25 years. This is a tremendous way to secure quarterly dividend payments. While the ETF does charge some fees to maintain, I feel that it is better than buying all the individual stocks, which will charge more in commission fees. But in case you just want to take a look at these "dividend all-stars," here are the top holdings of the SDY:
|Top 10 Holdings (26.98% of Total Assets)|
The ETF currently has a dividend of about 2.85% and a beta of .88, meaning it is less volatile than the market as a whole. It has a P/E of a little over 11.07, suggesting that the stock certainly has room to move upward. However, with the general run-up of the market, now may not be the time to invest all your chips, but definitely think about starting with a small position in SDY and then definitely adding to it if the market heads south.
Here is a look at a recent chart. The SDY is above its 200-day moving average, which is a bullish sign. The stock has performed very well over the last year, six months, and since January, with only minor blips:
Price Movement of SDY
One important thing to consider is that SDY's dividend payout is reliant on the companies in the funds. That means that the dividend will move up and down depending on if those companies decide to decrease or raise their dividends and it's a weighted average of those in the fund. While SDY helps to alleviate some of this risk because it only allows companies in the fund that have raised payouts for the last 25 years, it is not immune to cuts. A decreasing dividend environment is unlikely, in my opinion, given that companies are flush with cash, but if such a scenario does occur, it would drastically lower the attractiveness of this investment option.