Posted on Monday, 9th May 2016 by Dennis DampPrint This Post
Historically, approximately 40% of total stock market returns are generated from dividends and today you can expect to receive from 2 to 5% or more in yield from these investments. Many that recommend conservative dividend paying stocks look for companies that continue to grow their yield and share price over time with low risk.
It’s been eight years since the crash in 2008 and the markets have recovered to where they were just before the crash. Quality dividend paying stocks continued to pay increased dividends during the downturn and their price generally recovered quicker than others.
I reviewed the following list of conservative dividend paying stocks, all rated #1 for safety by Value Line, for this article. The stock name, symbol, yield and price is listed as of 5/6/2016. Five of the eight are listed in the *Dividend Aristocrats Index, a list of 50 stocks that have increased their dividends each year for 25 plus years. To be on this list the company must also be listed in the S&P 500 index and according to SureDividend.com, “The Dividend Aristocrats Index has outperformed the market by a wide margin over the last decade.”
- *AT&T (T) 4.94%, $38.99
- *EXXON Mobil (XOM) 3.41%, $88.51
- *Johnson & Johnson (JNJ) 2.85%, $112.74
- Kellogg (K) 2.6%, $75.02
- *Proctor & Gamble (PG) 3.28%, $82.13
- Verizon (VZ) 3.59%, $51.12
- *Wal-Mart (WMT) 2.98%, $68.25
- XCEL Energy (XEL) 3.32%, $40.46
During the 2008 market meltdown the stocks listed above dropped as little as 29% to as much as 52% from their highs. In other words, on average, these eight stocks dropped 39%. If you invested in higher risk investments you could have lost considerably more of your portfolio’s value. For example, Ford Motor Company went from a high of $9.70 in 2007, just before the crash, to a low of $1 a share in 2008, a 89.7% loss in value had you sold at the bottom. Ford recovered in 2009 when it reached a high that year of $10.40 and is now around $14 a share paying a 4.51% yield.
These conservative stocks continued to increase their dividends yearly unlike Ford that suspended their dividend for 5 consecutive years after the crash. Kellogg increased their dividend each year from $1.30 in 2008 to just over $2.00 a share today and their stock price only dropped 29% during the crash. Kellogg’s high just before the crash was $58.50, its low in 2008 was $35.60 and in 2009 it already recovered to $54.10. The patient ones, that didn’t panic and held conservative stocks had a much less volatile and rocky road to recovery.
AT&T recorded its low of $20.90 in 2008 from $43 in late 2007, a 53% drop. This stock has historically paid an excellent dividend, around 5%, and each year since the recession the yield has increased from $1.60 per share to $1.92 today. The stock price has hovered around the high 30s for the past 5 years and currently is $38.99 still less than the high just before the recession. Its stable earnings, low price to earnings ratio, and cash hoard of $259 billion dollars keeps the yield growing. They also have annual sales of $169 billion! If you had $10,000 invested in this stock for the past 8 years you would have earned an estimated $4,774 from dividends. Value Line projects that AT&T’s stock price could possibly increase to between $45 to $55 a share in 2019 to 2021.
Johnson & Johnson is another company worth mentioning. They pay close to a 3% yield and the stock recovered quickly after the 2008 crash. This stock dropped 36% from a high of $72.80 in 2008 to a low of $46.30 in 2009. By 2012 it reached its previous high and continued on from there to its current price of $112.74. Their dividend increased from $1.80 per share in 2008 to $3.15 a share today. A 43% increase. J&J was founded in 1886 and is one of the Dow Jones components. Who hasn’t heard of this company’s products and they are one of only two American companies still rated AAA for financial strength. Back in 1980 there were 60 companies rated AAA.
All of the listed stocks recovered to their pre-crash share price with the exception of AT&T, it is still about $4 below the $43 value it hit just before the downturn. According to SureDividend.com, “The company’s high dividend yield and long history of dividend increases make the company a favorite holding for many dividend investors.” If you are interested in dividend stocks the list in this article along with the stocks listed in the Dividend Aristocrats Index will get you started on your search.
When I evaluate a stock I consider many parameters including the Beta rating. A Beta of 1 means that the stock will more than likely follow the market in lock step. If the market goes up 2% a stock with a Beta of 1 may follow. The lower the Beta the less reactive the stock is to market volatility. Seven of the stocks listed above have a Beta of .65 to .75. This goes both ways. Less volatile stocks don’t lose as much in a down market or gain as much in an up market. EXXON has a Beta of 1.
The question is… Are conservative dividend paying stocks a safe haven for retirees? There isn’t a yes or no answer to this question because it depends on many factors including how losses ─ or perceived losses ─ impact your sleep at night. A loss is only a loss if you sell below your purchase price or panic and sell at the bottom. Many thought the sky was falling in 2008 and sold great stocks at significant losses only to see those same stocks recover six months to a year after the fall. It only took Ford a year to recover in price and those who added to their positions or purchased the stock at less than $2 a share made huge gains.
When investing in retirement it’s all about moderation and balance. What percentage of your total assets are invested in the market, bonds, cash and equivalents. You should only invest in the stock market if you are able to sleep at nights when the market corrects and you have sufficient cash or equivalents to see you through a serious correction. Many use a factor of either 100 or 110 compared to their age to determine what percentage of their investments should be in stock. I mentioned this in previous articles, essentially you subtract your age from 100 or 110 to determine what percentage of your investments should be in stock. In my case I use 110 and at age 67 I invest 43 percent in stocks, stock mutual funds and ETFs. Federal annuitants have their annuity to cushion market swings and that is why I use the higher 110 factor. Most retirees in the private sector have to withdraw from their savings to cover living expenses.
If you are seriously considering investing a portion of your assets in dividend stocks there are options available to further reduce your risk. There are a number of mutual funds and Exchange Traded Funds (ETFs) that focus on high quality dividend stocks. Helaine Olen and Harold Pollack in their book titled “The Index Card“ recommends avoiding individual stocks and Rule #5 in their book reads, “Buy inexpensive, well-Diversified indexed Mutual Funds and Exchange-Traded Funds.” I purchased multiple copies of this basic personal finance primer for my children and other family members this year.
The following is a sampling of mutual funds and ETFs that focus on dividend paying stocks:
SDY – SPDR S&P Dividend ETF (A Money 50 fund)(Expense Ratio .35%)
- SDY focuses on mid cap value U.S stocks, ones that have paid increasing dividends yearly for the last 20 years. The fund’s performance generally follows the S&P High Yield Dividend Aristocrats Index. AT&T, Caterpillar, Emerson Electric, and Nucor are among their top holdings. The ETF was established in 2005 and is rated 5 stars by Morningstar for 3, 5, and 10 year growth. The fund yield is 2.49% and it has a market return of 8.33% since its inception.
SCHD – Schwab US Dividend Equity ETF (Expense Ratio .07%)
- SCHD tracks the Dow Jones U.S. Dividend 100 Index and focuses on large cap value U.S stocks, ones that pay consistent dividends with sound financial strength compared to their peers. Microsoft, Coca-Cola, Chevron, Verizon, Exxon, and Intel are among their top holdings. There are a number of Dividend Aristocrats in this group. The ETF was established in 2011 and is rated 5 stars by Morningstar for their 3 year growth. The fund yield is 2.93% and it has a market return of 14.39% since its inception. This fund has the lowest expense ratio of this group.
NOBL – Proshares S&P 500 Dividend Aristocrats (Expense Ratio .58%)
- NOBL tracks the S&P 500 Dividend Aristocrats Index and focuses on large cap value and growth stocks, the majority of the selections are directly from the Dividend Aristocrats list. Nucor, Emerson Electric, Leggett & Pratt, Target and 3M are among their top holdings. They currently have 50 stocks in their portfolio and must keep at least 80% of their total assets in this index. This fund was established in 2013 and the yield is 1.89%. It has a market return of 12.62% since its inception.
VDIGX – Vanguard Dividend Growth Fund (Expense Ratio .32%)
- VDGIX seeks to provide income and long term capital gains by investing in dividend paying large cap value and growth stocks. This fund invests about 10% of their assets in international stocks and currently has close to 3% in cash. Microsoft, UPS, Honeywell, Colgate-Palmolive, McDonalds, and Coca-Cola are among their top holdings. They currently have 48 stocks in their portfolio. This fund was established in 1992 and the yield is 1.91%. It is rated five star by Morningstar for 3, 5, and 10 year performance.
SPHD – PowerShares S&P 500 High Dividend Low Volatility (Expense Ration .30%)
- SPHD seeks to provide income with low volatility by investing in dividend paying large cap value stocks. This fund invests 90% of their assets in securities included in the S&P 500 Low Volatility High Dividend Index. They currently hold 50 stocks in their portfolio. TECO Energy, HCP Inc, AGL Resources, Baxter International, Southern Co, and AT&T are among their top holdings. This fund was established in 2012 and yields 3.37%, the highest of the funds listed in this article. Morningstar rates this fund 5 star for 3 year performance.
It’s important to note that the statistics related in this article are indications of past performance and company and fund underlying performance changes over time. Just because a fund was rated in the top of its category in the past doesn’t mean that trend will continue. The stocks, mutual funds and ETFs mentioned in this article are not recommendations on my part, I’m not a professional investor or Certified Financial Planner. They are meant to be a starting point for your research so that you can make informed investment decisions. There are many additional funds and individual stocks for you to consider. If you don’t feel comfortable making investment decisions on your own consider hiring a financial advisor.
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Disclaimer: Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.