Dividend-paying stocks fell out of style last year because of rampant cuts and suspensions at the hands of the coronavirus pandemic. However, the dividend outlook is considerably stronger today, indicating investors should revisit payout stocks and exchange traded funds.
The PowerShares High Yield Equity Dividend Achievers Portfolio (NYSEArca: PEY), which offers high dividends and payout growth potential, is one compelling idea.
PEY tracks the NASDAQ US Dividend Achievers 50 Index, which “is comprised of 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends,” according to Invesco.
“Despite dividend stocks’ lackluster showing in 2020, I’d argue they still have a solid investment case. Dividends have historically made up a significant percentage of equity-market returns, as companies that start paying dividends typically have enough excess cash flow to continue making payments year after year,” said Morningstar analyst Amy Arnott in a recent note. “Dividend programs are often thought of as a way of encouraging discipline and sound financial management, as they make it more difficult for management teams to throw money at products and strategies that may or may not pay off.”
Prime Time for ‘PEY’
Stocks with steady dividend yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspend, or do not initiate or raise dividends.
“Dividend-paying stocks tend to fare worst during more ebullient markets, such as 1995-99 and the generally strong five-year period from 2016 through 2020,” notes Arnott. “Stocks paying higher dividends also tend to underperform during periods of rising interest rates. Even so, dividend stocks have outpaced the broader market during 25 of the 41 rolling five-year periods from 1976 through 2020.”
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses. PEY offers income hunters some value and pays a monthly dividend for steady income.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.