There’s supposedly an old Chinese proverb that says, “May you live in interesting times.” Although no source for the proverb has ever been found, the saying has been so widely circulated, it’s now accepted as legit.
Some even refer to it as the “Chinese Curse.” And it just struck again, as things got really interesting for the Fed andincome investors last week.
Will the Fed Think Twice?
As you know, the Fed taper starts this month. Yet the economic data, which was supposed to be the basis for the Fed’s highly anticipated end to quantitative easing, isn’t cooperating.
On Friday, the Bureau of Labor Statistics revealed that employers only added 74,000 jobs in December – a big swing and a miss for economists that expected close to 200,000 jobs.
“Friday’s shocking jobs number was an initial shot across the Federal Reserve’s bow,” says the Wall Street Journal’s Spencer Jakab. And he’s not exaggerating.
The Fed can’t contemplate (finally) raising interest rates, let alone tapering more than the already-announced $10 billion per month, if the economy can’t stand on its own. But based on the latest jobs report, it’s still wobbling.
Of course, any pause by the Fed means more waiting for yield-starved investors, too. (As if suffering through 30 years of falling interest rates wasn’t enough, right?)
Here’s the interesting part …If retail sales data (due out this morning) also disappoints, the Fed won’t have a choice but to be even more cautious about easing its stimulus. That means our zero-interest-rate world is here to stay even longer. And that raises the question – especially for retirees relying on the income from their investments to live – where’s the best place to find respectable yields right now?
Fear not, Barron’s is here to provide answers. The cover of the latest issue reads, “29 Great Income Investments for 2014.” (Way to narrow it down, guys!)
I’m pretty sure none of us have enough capital to spread across that many new investments. And that’s why today, I’m going to boil it all down to the single best income investment for 2014.
Without further ado …
Staying One Step Ahead of the Fed With Dividends
I’ll give Barron’s credit for at least prioritizing their list. And for picking the right investment for top billing – dividend stocks.
“It’s hard to beat a diversified portfolio of dividend-paying stocks for income and capital appreciation over the long term,” reads the article. I couldn’t agree more. With a few qualifications, of course. We don’t always have to focus on the long-term to be richly rewarded.
Dividend stocks – as represented by the Vanguard High Dividend Yield Index ETF (NYSEARCA:VYM) – delivered in the short-term, too. They handed investors a return of 30% in 2013. (As I’ll share in a moment, the stage is set for similarly strong performance this year.) Focusing purely on dividend-paying stocks for above-average income isn’t enough, either.
We need to focus on dividend-paying companies that also increase their dividend payments year-in and year-out. That’s the only way we can stay one step ahead of the Fed and inflation. I’m talking about companies like Ford (NYSE:F).
The Best Ways to Get a Dividend Boost This Year
Last week, the leading automaker announced a 25% increase to its quarterly payout, on the heels of its 14th consecutive quarter of positive operating cash flows. And now, the stock yields over 3% and trades on the cheap at 11 times forward earnings (hint, hint).
Also, if you can’t be bothered with the work involved with trying to find the next big dividend raisers, you still don’t have to miss out.
In our twice-weekly, “free-for-life” e-letter, we regularly feature companies set to hike their dividends. For example, back in October 2013, we predicted three companies – AFLAC (NYSE:AFL), Sysco (NYSE:SYY) and AT&T (NYSE:T) – would increase their dividends before the end of the year. (They did.)
Or, you can hit the super easy button and scoop up shares of the ProShares S&P 500 Aristocrats ETF (BATS:NOBL). Launched last fall, the ETF allows you to own a share of the S&P 500 Index’s perennial dividend raisers. Only companies with track records of increasing their payouts for at least 25 years are included in the fund.
There are a total of 54 companies in the fund now, which gives investors ample diversification. And they’re all equally weighted, too. So no single stock can undermine the overall performance.
Either way you play it, you need to own dividend-paying stocks right now. Why? Because as Howard Silverblatt predicts, the first quarter promises “to be a very busy, positive period for dividends.”
He expects that one-third of the year’s dividend increases will occur in the next three months. In other words, the dividend hikes are front-loaded and coming soon. Make no mistake, even after boosting payouts by a combined $56.7 billion in 2013, companies can still afford to raise dividends in 2014. Case in point: The dividend payout ratio for the S&P 500 remains at 36% versus 52%, historically.
Not to mention, cash continues to pile up on corporate balance sheets. At the end of the third quarter of 2013, non-financial S&P 500 companies were sitting on a combined $1.36 trillion, according to FactSet data.
Since share prices often rally on any such announcements, the outlook for dividend stocks in 2014 remains compelling.
Bottom line: If you need income, but you’re worried about the Fed’s actions cutting into your yields and your retirement – bet on dividend growers … right now. And rest assured, I’ll be in touch in the weeks ahead to share several under-the-radar, yield-maximizing strategies. Stay tuned!