Dividend Stocks Continue To Look Attractive

by: The Outsider

Dividend stocks (NYSEARCA:DVY) continue to distribute to shareholders a lot of cash, being clearly a very good alternative to other asset classes that yield virtually nothing, such as certificates of deposits or Treasury bills. According to Factset data, on aggregate American companies' dividend payments amounted to $76.3 billion for Q1 2013 and almost $320 billion over the trailing 12-months, which is a 10-year high. This is an increase of 15% year-on-year, showing how healthy are dividend-paying companies.

Furthermore, this increase is not due to a much higher dividend payout ratio given that it was 31.5% in Q1 2013, comparing to 28% in Q1 2012. On the sector level, the Telecommunications Services (NYSEARCA:IYZ) and Utilities (NYSEARCA:XLU) have the highest payout ratios leading also to the highest dividend yields at 4.5% and 4%, respectively. The number of companies paying a dividend over the last year also rose to a new 14-year high of 409. For 2013, the dividend growth is expected to be above 10%, which despite being lower than for the first quarter is still very good. On average, the S&P 500 (NYSEARCA:SPY) dividend yield currently amounts to about 2%, comparing favorably with long-term Treasury bonds. Moreover, despite these bonds being considered risk-free they have interest rate risk, which means that if interest rates start to go up, as they have done for the past few weeks, the price will decline leading to paper losses. Therefore, given that over the medium to long-term interest rates are likely to rise, for income investors dividend stocks continue to offer a better risk-return proposition than more conservative alternatives.

However, over the past few months dividend-paying stocks have underperformed non-dividend stocks, breaking a trend seen since the end of the global financial crisis of 2008-09. The recent speculation about the Federal Reserve's tapering its bond purchases has also penalized dividend-paying stocks. Nevertheless, despite what the Fed decides to do regarding quantitative easing in the short term its fed funds rate should remain near the zero bound for the next couple of years, maintaining the appeal of dividend-paying stocks.

Dividend investing is usually best suited for the long term, as the quality of dividend-paying stocks is best reflected over an extended period. Indeed, looking at recent past history high-dividend yield stocks show positive performance characteristics. Since the bursting of the dot.com bubble, dividend-paying stocks have outperformed the S&P 500 index. Therefore, the recent underperformance of dividend-paying stocks may be a good buying opportunity for those investors concerned about the income stream of their portfolios.

On the security-level, it is not enough to just look for high yields. They may be tempting but it can also mean that the dividend is not sustainable. For instance, Windstream Corp (NASDAQ:WIN) or Frontier Communications (NYSE:FTR) have high-yields but these companies had payout ratios greater than 100%, which is a warning sign. I have recently analyzed Philip Morris (NYSE:PM) here and McDonald's (NYSE:MCD) here as good dividend-paying stocks, and for those who are willing to take more risk Energias de Portugal (OTCPK:EDPFY) may also be a good investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.