At a time of such strong demand for dividends and safety, the quest for a reasonable yield amidst historically low interest rates has become quite a competitive sport. With that in mind, for this installment of Investing 101, we brought in Marc Lichtenfeld, author of Get Rich With Dividends and Associate Investment Director at the Oxford Club, to discuss ways to get more for your money by investing in income-producing stocks. He provided the following three tips to improve your performance and total return.
1) Perpetual Dividend Raisers
One of the best ways to get more bang for your dividend buck is to simply get more bang — that is, to get more and more money paid to you year after year. Lichtenfeld says the universe of these so-called serial dividend raisers isn't that big. "There's about 400 companies that have a track record of at least five years [of consecutive increases], but once you get out to 10 years, you cut that number in half," he says in the attached video. And, as you might imagine, in the case of Standard & Poor's Dividend Aristocrats portfolio of companies with a 25-year track record, the list shrinks down to just 51 companies. However, Lichtenfeld warns not all of the perpetual raisers offer great yields. He suggests finding the ones that have the track record but that also authorize the biggest percentage annual increase — and pay this highest yields, too.
2) Boring Is Good
In an increasingly active marketplace, many investors have embraced a trader's mindset and have declared traditional buy-and-hold investing dead. Lichtenfeld disagrees with that notion and has devoted a chapter in his book (called Snooze Your Way to Millions) to dispel this notion and make the case for low-turnover and reinvestment. "If you bought $10k of McDonald's (MCD) in 2001, by 2011 you had $46k, assuming you reinvested the dividends," he says, adding that the hamburger giant has a 35-year streak of dividend increases.
3) Aim Higher
Right now the yield on a 10-year Treasury is about 1.4%, while the S&P 500 currently has about a 2.2% dividend yield. Generally speaking, Lichtenfeld says 4.5% is a reasonable starting yield to shoot for, and says larger yields can often be found in REITs and MLPs. "It really goes across the board," he says, pointing out that above-average yields can also be found in consumer stocks, financials, telecoms, and utilities. "You can look through a wide range of stocks and diversify your portfolio as well," he says, reminding investors that higher yields typically carry higher risks.
To be sure, dividends play an important role for the total return investor but are not the only consideration. Still, research has shown that owning a portfolio of quality stocks that have shown a commitment to shareholders via consistent dividend increase is a proven formula for long-term success.
- Investment & Company Information