The United States government and Federal Reserve have implemented a clear economic strategy of pushing money into stock markets via monetary policy. By lowering interest rates to near zero, the Fed has in essence forced money into risk assets. Quantitative easing has further contributed to an environment where real rates of return on savings is essentially negative.
With savings accounts and bonds yielding such low returns (and negative real returns), money has been pouring into stocks and definitely dividend growth stocks.
With investors finding it difficult to find yield in a number of assets, a logical place to turn has been to the stock of companies that have a track record of increasing dividends over the years. Of course, this has steadily pushed the prices up on these stocks.
While rising stock prices is considered a good thing generally, being a younger investor, I view it as a negative. You see I'm in an "accumulation" phase with regards to assets and stocks, therefore I want to accumulate at low prices. If I'm in a liquidation phase (maybe retirement years), then obviously I want high prices at which I can sell. Ideally, I never have to liquidate and simply generate enough dividend income to live well.
So, this puts us in somewhat of a predicament because it is tough to find stocks attractively priced in the current environment. Many of the popular dividend stocks that we often hear about are definitely fully priced even when factoring in future dividend growth.
Two of my favorite companies are Philip Morris Int'l (PM) and McDonald's Corp (MCD) and both have had enormous runs recently. I'm finding it difficult to continue to accumulate shares at the current levels.
The only dividend stocks that you're going to find that have been either flat or negative recently are stocks that have something negative attached. Two examples are Wal-Mart Stores, Inc. (WMT) and Microsoft Corp (MSFT). I like both companies fundamentally and because their stocks haven't really budged for some time.
Why haven't they budged? Well, that is a lengthy conversation, but Walmart has been struggling to grow US sales (despite a healthy international growth story), and Microsoft is sort of viewed as a technology dinosaur that has missed out on the web and tablets and other technologies. As I mentioned, any stock that hasn't participated in a big way in the current bull market likely has some aspect of its business that is viewed in a negative light. As an investor, you need to determine whether or not this is a permanent mark on the company that will prevent future returns or if this is just a temporary situation that will be resolved. Personally, I like both of these companies and am buying both WMT and MSFT at current levels.
I recently outlined my two strategies for building massive dividend portfolios. They essentially differ with regards to one automatically reinvesting dividends via a DRIP and the other reinvesting dividends based on which stocks are more attractive at that time.
For many stocks, I think it is difficult to automatically add money into a DRIP account at this point. I currently actively invest in a DRIP for both McDonald's and Walmart, but I've ratcheted back the amount that goes into McDonald's each month due to the reasons cited above.
I don't recommend trying to time the market, but I do recommend paying attention to the market. If your favorite dividend stocks are going up and up, it doesn't mean you should sell them, but it might mean turning off automatic reinvestment or pooling some cash temporarily as you wait for more attractive buys.
Dividend growth stocks are indeed attractive assets to continue to grow and build your portfolio around. I will absolutely continue to do so, but I might be in the minority hoping for a correction in the broad market so I can get more shares for my money, which will ultimately lead to larger portfolios of dividend stocks.
If this article speaks to you, I'd encourage reading the article on the two strategies to build massive dividend portfolios, and also look through the excellent comments that have been contributed.
Disclosure: I am long MCD, WMT, MSFT.
