Do dividend stocks outperform the S&P 500?
According to a report by Gateway Financial Advisors, dividends outperformed value and the broader S&P 500 index in the 10-year period ending 2019.
Only seven among this group of 20 stocks had total returns, with dividends reinvested, exceeding the S&P 500's 89% return for five years through Monday. Then again, the average return for this group for five years was 103% - well above that of the index.
Key Takeaways. Dividend ETFs invest in high-yielding dividend stocks to maintain a stable, steady income. The S&P 500 is a broad-based index of large U.S. stocks, providing growth and diversification. The best choice for you will depend on whether you prefer income or growth from your investments.
Stocks and mutual funds that distribute dividends are generally on sound financial ground, but not always. Stocks that pay dividends typically provide stability to a portfolio but may not outperform high-quality growth stocks.
Many of these stocks frequently deliver relatively low growth. For example, of the five Dividend Kings with the longest records for dividend increases, only one has underperformed the S&P 500 over the past 10 years, while three have outperformed since 1990.
One downside to investing in stocks for the dividend is an eventual cap on returns. The dividend stock may pay out a sizable rate of return, but even the highest yielding stocks with any sort of stability don't pay out more than ~10% annually in today's low interest rate environment, except in rare circ*mstances.
“One mistake to avoid,” Cabacungan says, “is to buy a company's stock simply because it issues a high dividend.” If the company has leveraged excessive debt to fund the dividend, it could come at the expense of future profitability and hurt growth prospects.
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
In addition to providing consistent income, many dividend-paying stocks are in defensive sectors that can weather economic downturns with reduced volatility. Dividend-paying companies also have substantial amounts of cash, and therefore, are usually strong companies with good prospects for long-term performance.
Dividend ETFs or Dividend Stocks: Which Is Better? Dividend ETFs can be a good option for investors looking for a low-cost, diversified and reliable source of income from their investments. Dividend stocks may be a better option for investors who prefer to choose their own investments.
What are the 3 dividend stocks to buy and hold forever?
Dividend Stock | Current Dividend Yield* | Analysts' Implied Upside* |
---|---|---|
Johnson & Johnson (JNJ) | 3.1% | 25.3% |
Merck & Co. Inc. (MRK) | 2.4% | 10.6% |
Chevron Corp. (CVX) | 4% | 30.8% |
Coca-Cola Co. (KO) | 3.3% | 18.1% |
- Verizon Communications VZ.
- Johnson & Johnson JNJ.
- Philip Morris International PM.
- Altria Group MO.
- Comcast CMCSA.
- Medtronic MDT.
- Pioneer Natural Resources PXD.
- Duke Energy DUK.
Can an investor really get rich from dividends? The short answer is “yes”. With a high savings rate, robust investment returns, and a long enough time horizon, this will lead to surprising wealth in the long run. For many investors who are just starting out, this may seem like an unrealistic pipe dream.
Name | Price | Analyst Price Target |
---|---|---|
CVX Chevron | $156.71 | $183.60 (17.16% Upside) |
EOG EOG Resources | $132.59 | $146.71 (10.65% Upside) |
ET Energy Transfer | $15.21 | $18.33 (20.51% Upside) |
HESM Hess Midstream Partners | $34.74 | $37.50 (7.94% Upside) |
Company | Ticker | Years of dividend growth |
---|---|---|
Fastenal | FAST | 25 |
C.H. Robinson Worldwide | CHRW | 25 |
J.M. Smucker | SJM | 26 |
Church & Dwight | CHD | 28 |
Stock | Trailing annual dividend yield* |
---|---|
Crown Castle Inc. (CCI) | 5.9% |
Pfizer Inc. (PFE) | 5.9% |
Boston Properties Inc. (BXP) | 6.2% |
Kinder Morgan Inc. (KMI) | 6.2% |
Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable. Of course, there are some exceptions.
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
Stocks that pay dividends are shares of companies that make money. That means they have a steady profit they share with shareholders and they're probably not going out of business any time soon. This makes them a somewhat safer, less risky, option for retirees.
They offer relative stability, may pay increasing amounts over time and may provide steady income. But relying too heavily on dividend stocks as a primary investment approach could put you at risk and reduce your long-term investment gains.
How many dividend stocks should I own?
Whether you want to live off dividends today or are investing for the long haul, the best way to build a dividend portfolio for steady income is to follow a simple set of risk management principles: Hold between 20 and 60 stocks to reduce company-specific risk. Roughly equal-weight each position.
Ticker | Name | Dividend Yield |
---|---|---|
ARCC | Ares Capital | 9.49% |
HIW | Highwoods Properties | 8.45% |
ENB | Enbridge | 8.18% |
EPD | Enterprise Products Partners | 7.27% |
Once you hit your 40s, though, it's a good time to start looking for bargains on great dividend stocks. As you pass through your 40s, you can gradually increase your holdings of high-dividend stocks and cut back on the riskier, more volatile growth investments.
However, if you are looking for a regular and stable income, then dividends might be a better option. On the other hand, if you are more interested in making short-term profits, capital gains might be a better choice. Ultimately, it comes down to your preferences and the type of company you invest in.
S&P 500 Dividend Yield (I:SP500DYT)
S&P 500 Dividend Yield is at 1.35%, compared to 1.47% last month and 1.66% last year. This is lower than the long term average of 1.84%.
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