In this screen we look for the best dividend stocks to invest in available in the market today. As value investors, we like dividends but we also have several other requirements in our dividend paying stocks. We like to see great valuations, a history of solid dividend growth, and we also like to satisfy ourselves… [Read More]
Best Dividend Stocks, High Dividend Stock Lists and Screens with a Value Bias
Dividend stocks often lose favor as investor chase capital gains and other high growth strategies. For a value investor, dividends are an integral part of investing arsenal. Dividend investors may be looking at the income, but there is much more to dividend investing than just the quarterly check.
Why Dividend Investing is Important
There are various estimates around this but most credible estimates indicate that dividends generate more than half of an investor's long term return. One study by Bloomberg/Guinness Atkinson Asset Management (Source: Why Dividends Matter, pdf) found that for S&P 500, since 1940 dividend reinvestments accounted for over 90% of the total return of the index during this time. If you had invested $100 in 1940 and reinvested all dividends, your investment would be worth $174,000 at the end of 2011 versus a mere $12,000 if the dividends were not reinvested.
Consider the following chart from this report for S&P 500 returns in each decade since 1940s
|Decade||Total Return||Price Appreciation||Dividends||Dividends as % of total return|
Please note that this includes ALL stocks in the S&P 500 index, including the ones that do not pay dividends. If the study was done only with dividend paying stocks, the results might have been even more in favor of dividend stocks. Similar research by Strategas Research Partners came to a similar conclusion with data going back to 1930s. If the history is any guide, investing in dividend stocks and reinvesting the dividends should form the core of your investment strategy.
Doesn't a Dividend Mean the Company has Limited Growth Opportunities?
We are still fresh from the technology growth spurt when most tech companies chose to reinvest their profits into growing the business rather than paying a part of it to the shareholders as dividends. The argument that "these companies have tremendous opportunities in front of them so paying a dividend is counter productive" had gained widespread currency. While perhaps true in many cases, it is also of relevance that companies that choose to pay dividends are typically financially strong and pursue their growth and expansion with greater discipline. Many of these dividend paying companies in reality generate significant cash flow in excess of what they may need for their growth projects. Hoarding this cash is not the best use of capital.
It is also inevitable that every company goes through a lean phase at one time or another. Perhaps the competition is fierce and they lost market share, or maybe a weak economy has rendered their products a luxury. There may be management hiccups or a product launch or market entry gone wrong. Or the industry might be experiencing a cyclical down turn. Regardless, no management likes to cut dividends and if they are cut as a last resort, they are also likely to be restored as quickly as possible. A history of dividend payments instills discipline and a mindset that favors profitability over everything else. Growth for growth's sake without regard to profits is not good business.
Dividend income is no longer as tax inefficient as it used to be when it was taxed at the ordinary income tax rate. With this last hurdle removed, even some tech companies that used the tax argument to avoid paying dividends have now started to pay dividends to their shareholders.
Why Dividends Make Sense to an Investor?
Buying a stock for dividend income involves taking on more risk than other instruments such as bonds to generate income. However, for this risk, the shareholders are rewarded handsomely. The aforementioned Fayez Sarofim & Co report compares incomes from $100,000 invested in S&P 500 and another $100,000 invested in Barclays US Aggregate Bond Index between 1980 and 2013. While the annual dividend income increased from $5,234 to $32,416 in the S&P 500 investment, the annual bond income declined from approximately $11,000 to $3,000. The main reason being dividend growth. Most financially strong companies choose to increase their dividends over the years as the profits rise. For bond investors, the coupon is locked in and the yield changes are not as significant. There is also an added leverage of compounding faster when the stock price is depressed (when dividends are reinvested). While we can set up similar reinvestment program for bonds, the swings in bond prices are not as significant due to the fact that bonds offer greater investment security.
In a low interest rate environment, bond and other fixed income yields decline. Dividend yields are often superior to fixed income alternatives in such periods. Lower borrowing costs also helps increase profits and more can be paid out as dividends.
Dividends are a great inflation hedge. With rising prices, dividends often rise at equal or greater pace.
Finally, for value investors like us, dividends offer a tangible way of identifying a company's financial strength. Earnings forecasts, growth rates, market share, etc can all be a fiction but dividends are facts that we can see and touch.
Do we Recommend Reinvesting Dividends?
If you have no immediate need for withdrawing the dividend income, you should always reinvest dividends. For most investors, setting up a dividend reinvestment plan at their broker is sufficient. For more enterprising investor, we recommend letting dividends accumulate and selectively reinvesting them in the stocks in their portfolio that offer greater values. Always looking for the best values to reinvest their dividends in will make the portfolio compound at a faster rate via both dividend growth and capital gains.
In line with our value based philosophy, we frequently run dividend stock screens and generate lists of dividend stocks that we believe are the best undervalued dividend stocks available today. You will find these dividend stock ideas below. There are different screens we run to uncover different sources of value for these stocks and we take care to ensure that even when the stock price is depressed, the company has the ability to continue paying and growing dividends. Some of these are list of dividend stocks by industry, while others cover a variety of industries to help you in your asset diversification.
Today we go to the north of the border to find some of the best dividend stocks Canada has to offer. Each of these stocks is listed on an American Exchange as well as a Canadian Exchange, and is therefore easily bought and sold by both my US and Canadian readers. These 6 stocks have… [Read More]
High dividend stocks are attractive if they can be bought for a reasonable valuation. There is always a balance to find when looking for such stocks. We do not want to pick out the very high yielders, as they may indicate a company in distress and where the dividend may be unsustainable. The following list… [Read More]
TransGlobe Energy Corporation is a $550 million upstream oil and gas company headquartered in Canada, but with the vast majority of its operations located in Egypt. I’ve written before about searching for crises to look for stocks that have been overly beaten up by a herd of investors under the influence of what I call… [Read More]
Jeremy Grantham from GMO is predicting increasing scarcity of food products and resources that go into farming. This would result in higher prices we pay to buy produce. This is probably not a surprise to most of our readers as I suggested investments in the agriculture sector more than a year ago. So with higher… [Read More]
The Euro crisis hit Spain hard and Spanish bank stocks have understandably suffered. Now that the EU economy appears to have stabilized a bit, you may wonder if this is the right time to buy SAN or other Spanish banks. The Pain in Spain Spain followed a story line similar to United States. Cheap credit… [Read More]
Freeport-McMoran Copper and Gold Inc (FCX) explores and mines mineral resources, primarily Copper, Gold and Molybdenum. Recently, the company has made moves to enter the energy market by acquiring Plains Exploration and Production Company and McMoran Exploration Company for $20 B combined, which gives it access to high quality US Oil and Natural Gas reserves…. [Read More]
Before you worry that Autonomy sucked the wind out of HP’s sails, remember, HP does not even know where the ship is going. My recommendation? Keep avoiding the stock.
The automotive industry in the US has seen its ups and downs, and while it is resurging now, few years ago it was on life support. Many of the factors that were pulling the sector down, such as weak consumer demand, also affected the replacement tires market. Consumer’s were more likely to wait longer to replace their old tires, where possible. Cooper Tires is one of these tire companies that have seen worse days and is now rebounding with general improvement in the economy, and the economics of their business.
Credit crisis, mortgage meltdown, irresponsible risk taking and leverage, record bonuses and bailouts. Fast forward to today, and we have JPM with their “we were stupid” moment. We all know what the problem is. Or do we? The large bonuses give the traders every incentive to load up on leverage and risk. Most of the… [Read More]