Why dividend stocks are still your best friend

Traders on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Traders on the floor of the New York Stock Exchange.

Stop if you've heard this one already: Rising interest rates and a confluence of other factors are going to conspire to kill dividend-paying stocks.

The refrain is a familiar one on Wall Street, with each year seemingly bringing new warnings against the perils of dividend payers.

Yet with each passing year the trade continues to go strong, and 2015 is shaping up as no exception.

The group is off to a strong start. Funds that track divided payers have enjoyed an especially strong February, with many outperforming the S&P 500. An asset class often looked on with disdain by those seeking riskier and supposedly higher returns is showing resilience, and winning some converts.

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"Over the past 12 months, dividend yield as a style has outperformed in all markets apart from Japan," Credit Suisse analysts led by Andrew Garthwaite said in a report for clients this week. "In the euro area, U.K. and U.S., dividend indices outperformed their wider markets by 3.8 percent, 5.6 percent and 3.1 percent, respectively."

The analysis was more Europe-centric, asserting a new monetary easing policy from the European Central Bank would keep bond yields low and thus make dividend payers more attractive as investors become more willing to pay a premium for companies that provide income to shareholders even though stock prices may be sluggish.

In all, the Credit Suisse note set forth six reasons to own dividends: Low yields; regulatory easing; reasonable valuation for dividend stocks; strong inflows to high-dividend funds; solid earnings trends for the group; and the likelihood that European companies in particular are due to start allocating more to dividends than their U.S. counterparts.

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As the chart below shows, investors who have stuck with the dividend theme have been rewarded with outperformance against the S&P 500.

Dynamite dividends

Index
Month-to-date
Year-to-date
1-year
3-year
5-year
10-year
S&P 500 Dividend Aristocrats (NOBL) 2.06% -0.84% 20.16% 16.20% 15.31% 7.42%
S&P 500 Global Dividend Aristocrats (WDIV) 2.69% 2.80% 8.50% 7.47% 7.59% 2.59%
S&P 500 2.33% -0.84% 16.31% 14.93% 13.94% 5.43%
S&P Dow Jones Indices

Early indications from companies indicate that dividends will be a priority.

January saw a more than 10 percent increase in annualized cash payments. If no company changes its dividend rate—several, most notably GM and 21th Century Fox, have raised significantly in recent days—payments would increase 5.1 percent from last year's $57.1 billion, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Silverblatt notes that February is typically the biggest month for dividend hikes, while banks will announce their dividend plans in March.

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Among individual companies, he advised watching out for Exxon Mobil, which he expects to increase its dividend, likely in April.

For retail investors, there are a slew of dividend ETFs that provide broad-based exposure to the sector. Some of the top nonlevered—funds that don't deliver two or three times return using leverage—performers are below:

Symbol
Name
Price
 
%Change
Yield
DON
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VANG HIDIVYE
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SDY
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PFM
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HDV
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