Nothing reflects the financial health of a company quite like a good dividend. Trouble is, these are no ordinary times. In all too many cases, what looked like a rock-solid dividend has melted like wax, leaving investors skeptical about yield.
Citigroup Inc. has cut its once stellar dividend not once, not twice, but three times this year, bringing it to a third of its former size.
For those companies that haven't cut their dividends, there are still anxieties. General Electric Co. boasts that it has paid a dividend every quarter since 1899, and has raised it every year since 1976 – until last week, when it suspended its stock buyback program and left its dividend unchanged, flummoxing investors who thought they had a sure thing.
There was a time when dividend stocks could be relied upon for their consistent performance. Over the long term, dividends have accounted for about a third of stock market returns in the United States. But as David Templeton, author of the Disciplined Investor blog, noted, the average dividend payer in the S&P 500 has plunged 18 per cent this year.
The famous Dogs of the Dow – a strategy that entails buying the top 10 yielding stocks on the Dow Jones industrial average (hey, they can't go bust, can they?) and holding them for a year – have been mutts as well. This group of stocks has fallen 22.3 per cent since the start of the year, versus a 19.4-per-cent drop for the Dow, a substantial lag.
And here's the kicker: According to Morningstar, high-yielding dividend stocks have been more volatile than the S&P 500 this year, giving investors the truly wicked combination of a worse return and a bumpier ride.
You could certainly be forgiven for concluding that dividend investing is dead. But rather than burying it and moving on, you might do better by simply getting more selective with your dividend stocks.
That's why it makes sense to look at the classic defensive stocks. They might not pay out eye-popping dividends, but what they do pay out won't be affected by a slowing economy because people will always need shampoo and soft drinks.
Procter & Gamble is somewhat immune to bad economic news because it manufactures consumer products, which are bought regardless of the latest consumer confidence numbers. The stock yields 2.3 per cent, but it has doubled over the past five years.
Similarly, Coca-Cola Co. now yields 2.9 per cent, but the dividend has risen 73 per cent over the past five years – and it's a safe bet that the trend will continue well into the future.
And if you don't mind the ethical issues, there is always Altria Group Inc., the tobacco company. Its yield is 6.3 per cent – and you can rely on a growing dividend for as long as there are smokers, which isn't a bad bet.
