Over the last few years, the aggressive monetary policy plan by the Federal Reserve has left many income investors in a difficult position. The low level of interest rates has reduced the income-generating potential of traditional fixed-income products.
Increasingly, more people are creating an investment strategy, looking for stocks with a solid dividend yield to add income to their portfolio.
For dividend yield investors, 2012 was a great year. In total, the S&P 500 corporations paid $281 billion in dividends in 2012, a record high, according to analyst Howard Silverblatt at S&P Dow Jones indices. (Source: “Dividends Galore: Expect Another Record Year in 2013,” Wall Street Journal, January 7, 2013.)
The total paid out in dividend yield was a 17% increase from 2011, and a 14% increase from 2008, which was the previous high until 2011. As I’ve written before, special one-time payments played a large role in dividend yield for 2012. More corporations announced special dividends in December 2012 than at any other time since 1955.
Even though dividend yield taxes are going up, I still believe that due to the low interest rate environment, more institutions will be creating an investment strategy that will focus on placing their funds with companies that pay out a solid dividend yield.
Part of creating an investment strategy is to anticipate what other investors will do. While I do believe interest rates will eventually rise, this most likely won’t occur in 2013. For many people, this will leave an investment strategy to still favor dividend yield over the relatively low rates of fixed income.
With the 10-year Treasury yielding approximately 1.9% and the S&P 500 offering a dividend yield in excess of 2.1%, plus the potential for growth in the payout and capital appreciation over the next 10 years, the investment strategy, I believe, will be for a flow of funds out of fixed income and into equities.
The growth of firms issuing a dividend yield also continued to increase, as 14 new corporations initiated cash payments. This brings the total to 403 corporations that are issuing a dividend yield, adding to the appeal of an investment strategy that accumulates a basket of companies. (Source: Wall Street Journal, January 7, 2013.)
One caveat: because this investment strategy is not new or unique, many institutions have already begun investing into stocks that pay a solid dividend yield. The hunt for income is prevalent amongst a broad section of investors. What this means is that a person with an investment strategy to acquire stocks issuing a dividend yield must be patient and look for opportune pullbacks to accumulate positions.
While I think we are one to two years away from the beginning of higher interest rates, at which time an investment strategy needs to be reallocated, looking for temporary pullbacks in the market that will allow favorable entry into companies paying a dividend yield should be one of the many goals for the average long-term retail investor.
While the economy remains sluggish, finding stocks that are generating strong revenue growth will be difficult. This is another advantage for having an investment strategy with a portion consisting of stocks that pay a dividend yield, as they can help buffer the total return of the portfolio.
While the American government is in poor financial shape, corporations have never been stronger. Firms are holding record levels of cash and strong profit margins, so the majority of stocks that issue a dividend yield should have no problems continuing payments for the near future.
No market moves in a straight line. There will always be pullbacks along the way. For investors looking for income as part of their investment strategy, I would personally identify companies that I like with a solid dividend yield that the company is able to maintain and would look for attractive pullbacks in the price of the stock to accumulate.
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