William O'Neil, the legendary trader and investor who began Investor's Business Daily, once said, "All stocks are speculative". It's a reminder that there is risk in any and every investment; the idea that dividend seekers should have and we have at Dividend Genius is to understand risk and act accordingly, prudently. A corollary to O'Neil's statement is that if dividend stocks also go lower in a falling market, what can we do to mitigate this?
This seems obvious, but what does it mean? Well, if you are seeking an income stream for your immediate needs, whether it's for retirement, to fund an education, to buy a house, to start a business, or whatever purpose you need the income stream for, then your selections can be modeled on dividend paying stocks that have a high reliability factor. Investors who primarily seek safety in their stock yields might choose some of the traditionally strongest of what were once referred to as blue chip companies. Such names as industrial and consumer product conglomerate 3M (NYSE: MMM), which yields 2.4%, or pharmaceutical and health company Abbott Laboratories (NYSE: ABT), which yields 3.7%, or soft drink and snack giant Pepsico (NYSE: PEP), which has a 3% yield, are all recognizable household names with strong product lines and business strength. Many of these companies, if not most, routinely raise their dividends.
While these yields are not eye-popping, a two-year Treasury currently yields 0.39% while a three-year note yields 0.69%. The stocks mentioned are relatively are stable and solid for income investors who can buy enough shares to make it worthwhile. Another positive factor is that while these stocks will also fall in a down market, many of them tend to do so less than more volatile names. 3M, for example, recently traded at $91.78 per share, certainly within reasonable distance of its 52-week high of $97.95 per share. These kinds of stocks are probably even better for long term investors to hang onto, especially if they don't need to spend the stream of cash they're getting. Capital appreciation of these stocks tends to be slow and steady, but also valuable, more so of course for the long term holder.
US Treasury Bonds Rates
|Maturity||Yield||Yesterday||Last Week||Last Month|
Source: Yahoo Finance
Climbing The Ladder Of Yield
Wall Street often refers to the "wall of worry," when heavy concerns are in the air and the averages must scale this wall to advance. But there's also something else to climb, the ladder of yield. There are stable stocks that yield more than the solid blue chips already mentioned. Many of the telecom stocks, notably household names such as Verizon (NYSE: VZ) and AT & T (NYSE: T), have attractive yields. Verizon currently yields 5.5%, AT & T, 5.6%.These stocks' potential for capital appreciation can be debated, but the yields are usually supported by strong cash flow which covers the dividend payout handily. These names aren't usually going to plummet even if there's a pull back or strong correction in the market.
Some Large-cap Dividend Yields
|MRK||Merck & Company, Inc.||4.30%|
|VZ||Verizon Communications Inc.||5.50%|
Source: Yahoo Finance & Seeking Alpha
Moving Up Further
Regional telecoms also pay good dividends, as some feature high yields to compensate for their slightly increased risk compared to the mega telecoms such as Verizon and AT & T. Century Link (NYSE: CTL) currently yields 7.4%, while Consolidated Communications (Nasdaq: CNSL) now pays 8.1%. These companies usually have to devote a higher percentage of their cash to dividend payouts to entice investors, so that higher payout rate makes them slightly more risky. But only slightly. Many of the regional telecoms are steady, reliable dividend payers.
Many of solid dividend payers are well-known companies that have a long history of steady dividend paying as well as some capital appreciation thrown in the mix. They also provide a fairly high degree of safety, keeping in mind at the same time the O'Neil observation that all stocks are speculative. A safety-minded investor can still construct a fairly good income stream of dividend paying investments which will allow him or her to sleep well at night.
These mentions are hardly exhaustive of the kinds of yields investors can find. These are fairly widely known types of dividend paying equities, but there are other types of income paying investments. There are oil and gas master limited partnerships, royalty trusts, dividend paying ETFs, even ETNs, which are exchange-traded notes, as well as preferred stocks and closed-end funds which may pay dividends. Some or all of these may be appropriate for you as an investor. Some digging can take you past the obvious dividend investments and lead you to many of the more exciting ones, or you can allow us at Dividend Genius to do the digging for you. Either way it can prove very rewarding.
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