Last week the Fed surprised the market when it announced it would continue its quantitative easing program. There was no “taper.” That is good news for the better-yielding stocks because short-term rates will stay low well into 2016. Dividend stocks will be in the sweet spot.
Historically, dividends account for 43 percent of the stock market’s long-term annual return of around 10 percent.
Considering that the market is already up 19 percent this year and the profit and economic outlook is sub-par, one would expect dividends to play an increasingly large role. And they will.
While the interest that a bond pays remains the same, dividends can increase every year and for many companies they do.
Eighty-three percent of the S&P 500 stocks pay a dividend, and the payout ratio is 32 percent, so there is ample room to raise them. AT&T’s payout ratio is 70 percent. General Electric is 40 percent. Utility stocks have high payout ratios, too, but many companies pay much less.
For taxable accounts, dividends help protect gains from the IRS. The top dividend tax rate is 20 percent, and that’s only for those in the top tax bracket.
I don’t recommend reinvesting dividends in taxable accounts because the cost-basis calculations can become very complicated over a long period of time.
For some time I’ve made the case that investors searching for income will turn to stocks for lack of an alternative. The acronym TINA says it all: “There Is No Alternative.”
After last week’s Fed meeting, that is every bit as true today. My favorite dividend ETF is Schwab Dividend Equity (SCHD). I also like MDU Resources (MDU), BP Plc (BP) and others. These have served my clients well.
— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.