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Dividend Stocks Continue To Show Their Mettle

|Includes: IBM, JNJ, McDonald's Corporation (MCD), MO, SPH, VGR
The old market saying tells investors that "one day does not a trend make," but on any given day, Mr. Market can impart some valuable wisdom upon astute investors. The key is reading between the tea leaves (another popular market metaphor) to see exactly what the market is telling us. For example, take a look at the market action on Tuesday. The Dow absorbed a triple-digit loss thanks to some glum news out of Europe, but volume was light and we had just seen a pretty solid rally last week, so it might appear Tuesday was just a case of some profit-taking.

Maybe, but there's a more important lesson. Look at the stocks that were making 52-week highs on Tuesday (Yes, new highs can be made even when the Dow loses 100+ points). Most of these stocks share something in common: They're low-beta dividend payers. So what's the lesson here? Dividend stocks work in almost any market environment. Put another way, there's rarely a bad time to be invested in dividend stocks.

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Just look at a few of the names that made new highs on Tuesday despite a weak market. McDonald's (NYSE: MCD), a Dow component, continued its meteoric rise. Suburban Propane Partners (NYSE: SPH), a sleepy little propane master limited with a yield of almost 7%, turned in a solid performance. Pick a tobacco company, large Altria (NYSE: MO), or small Vector Group (NYSE: VGR), and you'll find a new 52-week high. By the way, all these stocks made new highs on Wednesday, too, showing just how strong dividend stocks are in this environment.

Don't feel convinced by just one or two days of market action? That's fine, but consider this. According to a Bloomberg News article that crossed the wires on Tuesday, more U.S. stocks are paying dividends that beat bond yields than at anytime in the past 15 years. Bloomberg says there are 68 companies in the S&P 500 that offer yields that are superior to the 3.8% average rate investors can find in the credit markets.

The chart below illustrates how rare it is that the S&P 500's yield outpaces what Treasuries offer, but even corporate bonds are lagging yields on stocks. Corporate bonds from a blue chip company like McDonald's or IBM (NYSE: IBM) are among the most dependable investments out there, but why opt for the bonds when the company's stock is paying a better yield and offers a better chance for capital appreciation?

Dividend Stocks Continue To Show Their Mettle

Dow component Johnson & Johnson (NYSE: JNJ) sold 10-year debt at yield of 2.95% in August, according to Bloomberg, but the shares currently yield 3.7%. It's simple math: The stock is the better bet than the bonds. Despite the volatility that has been so present in the market this year, triple-digit moves in the Dow on a regular basis, the Flash Crash, etc., the case for dividends hasn't changed. If anything, dividends are more important now than they have been in years, maybe ever.

When was the last time S&P 500 dividend yields outpaced corporate bonds? The Bloomberg report tells us it was March 2003, just as a new bull market for stocks was in its nascent stages. Obviously, there are no guarantees that a new bull market for all stocks is currently forming, but smart investors can create their own personal bull markets right now with dividend stocks.

Committed to your Global Profits,

Jim Trippon

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