The Federal Reserve appears on the verge of finally raising short-term interest rates for the first time since the bank dropped it to zero during the 2008 global financial crisis. The shift toward a higher interest rate environment will be positive for retirees, who often rely on interest rate returns for an income stream.
Don’t get too excited, though. The Fed is expected to hike interest rates at a slow and measured pace to maintain financial market equilibrium and avoid shocking the economy and overall growth. This means income-oriented investors still need to look for other sources of income beyond traditional certificates of deposit and other bank interest-bearing accounts.
Dividend investing, or choosing stocks with a reliable cash payout, is a proven strategy. “In the stock market, there are two paths to return on investment: capital appreciation and dividends. Of the two paths, the only one with any reliability is the cash dividend,” says Kelley Wright, chief investment officer of IQ Trends Private Client Asset Management, a Carlsbad, California-based registered investment advisory company.
Investors seeking a reliable rate of return can look to blue-chip dividend-paying stocks with confidence. “The cash dividend is a company policy. It must be voted on, declared and authorized by the board of directors, who arguably know the current condition of the company better than anyone else, as well as the prospects for the future. The cash dividend has a record date, an ex-date and a pay date,” Wright says.
Dividend investing turns stocks into sources of current income more like bonds or even an old-fashioned high-yield certificate of deposit, says Hilary Kramer, New York City-based editor of the GameChangers stock newsletter. “Think of it as annuitizing your capital. The higher the implied rate of return you can capture, the faster the quarterly distributions will pay back your initial investment. Maybe the share price increases in the meantime, but that’s just a bonus,” Kramer says.
When you buy a stock, the dividend rate is locked in. “If you buy a $10 stock paying $1 a year, you’ll earn that 10 percent a year until the dividend policy changes or you sell out. The stock may climb to $20, but your $1 remains the equivalent of a 10 percent return on your initial capital,” Kramer says.
Dividend investing is suitable for long-term investors looking to create wealth over time, as well as anyone looking for an additional income stream. “Retirees have favored high-yield sectors like utilities and telecom for generations because you can often live on the income and keep the shares, which should still creep up in value year to year,” Kramer says.
There are different ways to identify strong dividend investments. IQ Trends Private Client Asset Management looks for stocks that meet a number of criteria, which includes companies that have posted dividend increases five times in the last 12 years, have shown improving earnings in at least seven of the last 12 years and have experienced at least 25 years of uninterrupted dividends, Wright says.
Dividend investing is generally a long-term strategy, and investors may want to look twice at a company offering a big payout. “Be choosy. There are 200 stocks on the market right now with an implied yield above 10 percent. They’re not all going to deliver. This is the equivalent of what high-yield or junk bonds pay, and the risk framework is similar,” Kramer says.
Now could be a time to lock in solid dividend payouts for beaten-down stocks. “Right now is an interesting moment because everyone recognizes that the Fed is getting ready to tighten interest rates, which has left utilities and other traditional yield stocks falling from favor. Capture the best ones in their deepest weakness, and you could actually lock in a chance to earn 8 percent or more on your money, guaranteed until the company’s story changes dramatically,” Kramer says.
Here are a few dividend-paying stocks that analysts like now.
Johnson & Johnson (ticker: JNJ). “Our flagship portfolio, the Gradient 50, invests in 50 equally weighted U.S.-based blue-chip companies that pay a generous dividend and have a history of raising that dividend,” says Michael Binger, senior portfolio manager at Arden Hills, Minnesota-based Gradient Investments. He says that Johnson & Johnson, a diverse company in the global health care market, is a top dividend stock to consider. “The company continues to innovate and acquire to grow its sales and profits and has performed very nicely, paying a generous dividend with a long history of raising that dividend on an annual basis,” Binger says. JNJ pays a dividend of 3 percent, and has increased its dividend for 52 consecutive years.
Verizon Communications (VZ). Verizon is a bellwether company in the telecommunications services industry. “They have done well to transform their business from landline-centric to a wireless-based business. On top of being a dominant company in its market, Verizon pays a generous dividend that is well covered by its strong cash flow,” Binger says. VZ pays a dividend of 5 percent.
Altria Group (MO). Altria is the domestic tobacco company famous for its Marlboro brand, which holds a nearly 45 percent share of the U.S. market. “While tobacco usage continues to decline, pricing continues to creep up, and costs continue to drop. Dividends have been raised each year since 1970 and are expected to continue to grow 6 to 8 percent annually,” Binger says. MO stock pays a dividend of 4 percent.
Procter & Gamble Co. (PG). Procter & Gamble is a multinational company that produces consumer staples products including household brands such as Bounty, Charmin, Crest, Dawn, Downy, Gillette, Head & Shoulders, Pampers, Swiffer, Tide and Vicks. Wright likes PG stock because it has had an average annual dividend increase of at least 10 percent for the last 12 years. PG stock pays a dividend of 2.4 percent.
When it comes to dividend investing, the bottom line is simple. “The cash dividend, which is an immediate return on investment, is the most reliable profit path in the stock market,” Wright says.
More from U.S. News
11 Stocks That Donald Trump Loves
16 Things Investors Should Know About Crowdfunding
12 Terms Every Investor Needs to Know
4 Dividend Stocks That Will Make Your Portfolio Blossom originally appeared on usnews.com
