Give Thanks For Dividend Bargains

My wife and I hosted a big Thanksgiving dinner last Thursday, and as you might expect, the subject of investing came up before we even sat down to eat.

Everyone from current retirees to a recently-minted lawyer and an MBA student were in attendance. So the thoughts, experiences and opinions were truly diverse.

But as I argued to my family members - dividends are one thing we can all depend on, no matter what investing stage we are at in life.

The first point I made was this …

Dividend Stocks Are Generally Looking More Undervalued Than the Broad Market Right Now

The rebound in share prices has been almost as dramatic as the plunge last year. And it’s worth noting that during the decline, dividend-paying stocks were again able to hold up better than their non-paying counterparts.

However, what’s more interesting to me is that more conservative companies - precisely the kind that pay dividends - have been lagging the market on the way back up.

From the beginning of the year through November 21, dividend-paying stocks rose only 21.3 percent vs. a 55 percent gain for non-paying shares.

Some would use that as proof that dividend stocks are dogs. Me? I view it as a positive. Because it means we can still buy into the market today at relatively reasonable prices.

In fact, as a recent Wall Street Journal article pointed out:

“A lot of these steady Eddies have been left behind by this year’s mad stampede for higher-risk, higher-excitement investments - from China to the Cheesecake Factory.

“It’s a good time to remember that high-excitement stocks often end up providing investors with high drama and high blood pressure instead.

“More boring ‘value’ stocks - established companies in more stable or ‘defensive’ industries - have usually proven a better long-term investment. (Defensive industries include food and beverages, health care, personal care, household goods and even telecoms.) And even if they make fewer profits for you on the way up, they lose a lot less on the way back down.”

I have been making that same point here for quite some time (and using the term “Steady Eddie,” too).

After all, why go through gut-wrenching ups and downs when you can collect solid income now and rest assured that your holdings aren’t fly-by-night operations?

Companies with rock-solid brands and relatively stable businesses are clearly great long-term investments. What’s more, they are also the biggest dividend payers right now.

This is precisely why I gave my Dividend Superstars subscribers two more consumer staple recommendations in the issue that just went to press.

Of course, you might be wondering, as some of my family members were …

What About Declining Dividend Payments? Aren’t They Still a Big Concern Going Forward?

There’s no question that this recession has taken a major toll on both corporate profits and, by extension, dividend payments.

According to data from Standard & Poor’s, payments made by S&P 500 constituent companies dropped 24.1 percent in the recently-closed third quarter vs. the same period last year. Moreover, S&P expects a full-year drop of 23.1 percent … for a total loss of $56.2 billion
in dividend payments.

At the same time, it’s not all bad news. Many firms didannounce new payments in 2009 … and plenty more continued to increase their dividends. I count a number of them among my recommended stocks.

Better yet, there are reasons to believe that we’ve now seen a bottom in the dividend cycle. For example, S&P notes that the indicated payment on its benchmark index has recently been ticking up.

No, that doesn’t mean every dividend is safe from here on out. Nor does it mean that we will see every former dividend payer quickly re-initiate its payments in 2010.

The road to recovery will take time. Some companies may never regain their former status as income safe havens.

Still …

I Think the Very Best Dividend Stocks Remain Great Buys Today, and Will Reward Investors for Many Years to Come

There are already signs that dividend-paying shares are starting to spring to life.

Based on total returns (capital appreciation plus dividend payments), dividend stocks outperformed non-payers in October and were in a dead heat going into the final week of November.

That’s probably because investors are both re-positioning themselves into more conservative stocks as a hedge against a renewed market decline and also because yields of 3 percent, 4 percent, and even 7 percent are just too good to pass up any longer.

I think they’re right to flock to dividend shares on both counts. Heck, I can’t think of any time not to have some of these all-weather firms in an investment portfolio, especially when steady income is a goal.

So as you sit down over the next few weeks with friends and family and discuss your investment strategies for the coming year, please keep conservative dividend stocks in mind. At today’s levels, I consider them the investment gift that will keep on giving for many years to come.