Amid the market turmoil this year, dividend stocks can be a relatively, if not absolutely, safe haven for investors. Firstly, stocks that consistently pay dividends tend to do better than growth stocks during bear markets. While the price of a dividend stock most likely falls along with the broader market, the company behind the stock usually continues paying a dividend to shareholders. This pushes the dividend yield higher, which is the ratio of per share dividend paid by the company to its stock price.
Dividend stocks fare better than the broader market so far this year
Through the first six months of 2022, the S&P 500 High Dividend Index (SPXHDUP) – comprising of the 80 highest-yielding stocks in the S&P 500 – and the S&P 500 Dividend Aristocrats (SPDAUDP) have remained most resilient during the current market conditions and have shed about 4.5% and 13.3% respectively. Both the dividend indexes have fared better than the benchmark S&P 500 (SPX), which has lost over 20% this year.
Exhibit 1: YTD performance comparison of dividend stock indexes with the benchmark index
(Chart based at 100)
|YTD Return (%)
|S&P 500 High Dividend Index
|S&P 500 Dividend Aristocrats
Source: S&P Global, Data as of 30 June 2022
Benefits of investing in dividend stocks
Besides performing better during a bear market, dividend stocks also gain when the market is bullish. They are less volatile and offer steady income at reduced risks. Dividend stocks also have the potential to appreciate in the long term. They give investors a way to earn cash flows on their investment and benefit from a company’s growth even without selling the stock. Dividend stocks help diversify a portfolio and reduce risk as dividend payments can offset losses arising from a fall in stock prices.
Paying regular dividends is also beneficial for the company. It reflects the management’s confidence in the company’s future earnings growth. Rewarding shareholders with dividend increases investor loyalty and attracts new investors, boosting stock prices. Additionally, paying cash dividends and enhancing shareholders’ wealth is a good use of extra cash held with the company.
A company like Procter & Gamble (PG) has been paying a dividend to its investors for 132 straight years since its incorporation in 1890. Moreover, the company has been increasing its dividend for the 66th consecutive year. P&G is a dividend aristocrat – a term given to select 65 S&P 500 stocks that have not only been consistently paying a dividend to investors but have also been increasing their annual payout for 25-plus years.
How to evaluate the dividend-paying stocks?
While evaluating a dividend stock, dividend yield should not be the only criteria. In fact, an abnormally high dividend yield may be a red flag. One should also look at the company’s dividend-paying history, specifically the rate at which it has increased its payout. A lower payout ratio signals that a dividend is sustainable, and vice versa. The payout ratio is the dividend expressed as a percentage of a company’s earnings.
Here is a list of some of the dividend aristocrats with the highest 5-year dividend growth
Source: Suredividend.com, Share prices as on 4th July, 2022
Dividend-paying technology stocks
Tech stocks are hardly ever associated with dividend investing. They are notorious for not paying dividends and are considered too volatile. However, some well-established big tech names have a history of robust earnings. These companies need not reinvest all their profits in business. Hence, they have started rewarding their shareholders by implementing dividend policies.
Besides investing in stocks directly, investors interested in dividend-paying tech stocks may also want to consider First Trust Nasdaq Technology Dividend Index Fund ETF (TDIV) that tracks a modified dividend-weighted index of technology companies that pay regular dividends.
Here is a list of some of the dividend-paying tech stocks
|International Business Machine
Source: Yahoo Finance, Share price as of July 4 2022
Investing in dividend ETFs
If one finds evaluating and managing a diversified portfolio of dividend stocks a big task, then they may consider investing in dividend exchange-traded funds (ETFs) as a hassle-free way to earn some income. Coming from reputed fund families, dividend ETFs offer a sustainable cash flow as they are invested in a variety of large-cap and mid-cap stocks that pay dividends.
Similar to investing in dividend stocks, choosing a dividend ETF involves looking at dividend yield, the pace of growth of dividends and the quality and creditworthiness of the stocks that a particular ETF owns.
Here are some of the popular dividend ETFs available on our platform
Source: Yahoo Finance, Data as of 30 June 2022
Dividend-paying stocks are likely to be less volatile than the non-dividend-paying stocks, in general. However, they are not completely immune to the vagaries of the stock market. Investors should invest their money in dividend stocks or ETFs for a long-term horizon and not worry too much about their day-to-day price movements.
Dividend investing may appeal more to individuals who are conservative with investments with low-risk appetite and are interested in generating a stable cash flow for retirement. Nevertheless, dividend stocks and ETFs can be a great addition to any diversified portfolio, depending on an individual’s overall return expectations and risk tolerance.