as part of our
Investors are starved for yield. It's not exactly breaking
news. With traditional savings vehicles such as savings
accounts, CDs, and bonds yielding next to nothing, investors have
been flocking to dividend-paying stocks for years.
On the surface, this makes all the sense in the world.
Unlike fixed income investments, dividend-paying stocks tend to
enjoy rising payouts over time (or at least they do if you choose
There's just one problem with this. Defensive,
dividend-paying sectors are, as a group, expensive relative to the
broader market. Investors are paying a premium for slow
growth…which is not exactly a recipe for long-term investment
As an example, consider the utilities sector.
The Utilities Select Sector SPDR (
a popular ETF proxy for the sector, trades for 16 times earnings
and yields just 3.7%.
Utilities have had good multi-year runs. In the 2003-2007
bull market, utilities were actually one of the best-performing
sectors. But it's hard to get excited about them at current
Surprisingly, some of the best dividend deals on offer are in
the tech sector.
Microsoft ($ MSFT), Intel ($ INTC)
Cisco Systems ($ CSCO)
yield 2.8%, 3.7% and 3.2%, respectively, and all trade at very
modest valuations. All have also been aggressively raising
their dividend in recent years. Cisco has nearly tripled its
dividend in the past year and a half, and Microsoft and Intel have
raised their dividends by 15% and 7%, respectively, in the past
year. Not bad for boring "old" technology companies.
If you are building an income portfolio, you have a
choice. You can load on slow-growth utilities. Or, you
can build a portfolio of solid technology companies with dividends
not too much lower that offer far great potential for growth in the
dividend stream over time. The choice should be obvious.
Action to take:
Buy "Big Tech" for dividend growth. Use a stop loss
appropriate for your risk tolerance; I recommend something in the
ballpark of a 20% trailing stop.
This article first appeared on TraderPlanet.
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