I read an article titled “Rising Markets are Bad for Dividends”. The premise of the article was that rising stock prices tend to bring yields down. As a result the best time to invest in dividend stocks is during market meltdowns. As a long term dividend investor, I disagree with several points of the article.
First, while rising prices typically result in decreasing current yields, the dividend payments remain unchanged in most circumstances. Even better, if you select some quality dividend stocks such as McDonald’s (MCD) or Coca-Cola (KO) your dividend payment is likely to increase over time. As a result investors who purchased at the lower prices have essentially managed to lock in the higher yield. This means that their yield on cost would be higher than current yields and would most likely increase if the company raises distributions.
Right now Aflac (AFL) trades at $44 and yields 2.50%. Back in January 2009 however, I was able to purchase some shares at $25.24/share. The stock dividend was 28 cents/share, which meant that the yield at the time was 4.40%. The stock subsequently fell to as low as $10.83/share, before recovering to $50. Despite the market fluctuations however, my yield on cost has remained 4.40%. The capital gain is a bonus, which is still important however. If Aflac (AFL) decides to raise distributions, my yield on cost would be even higher.
Second, while it is good in theory to wait for the perfect set up in order to purchase stocks, this theory could fail the reality test resulting in poor performance over time. Investors who purchased stocks in late 2008 and throughout 2009 have made money, because stock prices were depressed. The last time stocks fell as much as they did during the 2008-2009 stock market collapse, was during the bursting of the tech bubble in 2000-2003. This means that investors that missed the perfect opportunity to purchase stocks between 2000 and 2003 had to wait for at least four years, before deploying their capital. In the meantime, their portfolios would have likely underperformed the market, and would have generated little income. Few investors could have managed to remain on the sidelines for such a long time, without doing anything. Waiting too much for the perfect set up also sounds a lot like market timing. Most investors who time the markets however are not as successful as buy and hold investors.
While in hindsight it is easy to pinpoint where the market bottom was, in reality few investors can predict with accuracy any market bottom. Back in 2007 or 2008 for example, the market had several bottoms, which definitely looked like sustainable bottoms. Investors, who were eager to invest at what seemed to be the lowest prices in many years, quickly realized that markets could always go down more.
As a result the best strategy for building a sustainable dividend portfolio is to select at least 30 stocks which fit your entry criteria, and then slowly increase your exposure in each of them. You won’t pick the bottom of the market, but you also invest everything at the top either.
I have highlighted five prominent dividend growth stocks below:
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. This member of the dividend aristocrats index has raised dividends for 33 consecutive years. The stock yields 3.30 %. (analysis)
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristocrat has raised distributions for 48 years in a row. The stock yields 3.40%. (analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company has consistently boosted distributions for 38 consecutive years. The stock yields 3.70%. (analysis)
Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and Latin America. This international dividend achiever has rewarded shareholders with higher distributions for over a decade. The stock yields 4.10%. (analysis)
Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. This dividend aristocrat has raised dividends for 35 years in a row. The stock yields 3.30%.(analysis)
Full Disclosure: Long ABT, ADP, KO, MCD and UL
This article was featured on Carnival of Personal Finance #261: Pop Art Edition