Dividend Stocks are Out of Favor and Therefore Should Be Considered

If you doubt the transient and trendy nature of markets, you need only look at dividend paying stocks. Six months ago, it seemed that you couldn’t open a newspaper or a web page without seeing an article about the wisdom of owning solid dividend payers. Bond yields were depressed and looked as if they would stay that way for some time. For those sinking income a 3.5-4.0% yield from an instrument with growth potential looked like a slam dunk.

Then, back in May, everything went horribly wrong. Ben Bernanke dared to mutter the word that shouldn’t be said (“tapering”) and the magic spell was broken. Anything whose dividend had enhanced its value was out of favor.

The reason is fairly simple. As the Central Bank bought bonds (QE), so the price of those instruments rose, resulting in lower yields. (If the return on a bond is a fixed dollar amount, then as the price of the bond rises that amount becomes a lower percentage return.) This made the yield from dividend stocks appealing by comparison. The possibility of a reduction and eventual ending of that policy caused bond prices to fall, rates to rise and therefore the yield from stocks to look less attractive.

All four main classes of dividend payers, telecom stocks, REITs, utilities and established industrial companies were hit. The first three sectors were hit particularly hard. Telecom, real estate and utility companies tend to carry a lot of debt (be “highly leveraged”) so not only were their dividends less attractive, the cost of debt service also increased.

If you believe, as I do, that the market is prone to over react and that many of the effects of tapering are now priced in, it is possible that buying solid but hard hit stocks in these sectors could be a good idea.

It so happens that, if you screen S&P 500 stocks for those that have increased their dividend annually for 25 years, then rank them by current dividend yield, the top four stocks, AT&T (T), Health Care Property Trust (HCP), Con Ed (ED) and Leggett Platt (LEG) consists of one company from each of those sectors.

AT & T (T)

The chart for AT&T looks a little scary, with a giant head and shoulders pattern taking shape, suggesting that the next move will be to the downside. Add to this the extremely competitive nature of telecom and wireless in particular and there are good reasons not to invest. If you buy into the basic thesis, however, that dividend payers are oversold, then a 5.4% yield looks attractive.

HCP, Inc. (HCP)

On July 2nd, when REITs were recovering somewhat, I wrote that there were more declines to come. This did turn out to be the case, but now the worst is probably over.

For the techies out there, on Thursday HCP’s RSI (Relative Strength Indicator) broke below 30, giving a clear oversold indication. If you are a little skeptical of technical analysis then just look at the chart; HCP has taken a beating. It looks like the stock of a company in trouble, but EPS of $2.10 suggests anything but. The 5.29% yield looks pretty juicy right now.

Con. Ed (ED)

Of the four sectors mentioned above, utilities are probably my least favorite with the exception of those that have already embraced alternative fuel sources such as NextEra (NEE). The already leveraged companies are facing a future of more investment should government regulations on emissions tighten, and they have limited pricing power.

If you disagree, however, Con Ed yields 4.46%, so could be useful for income purposes.

Leggett Platt (LEG)

LEG, founded in 1901, makes furniture and fittings for homes, offices and automobiles. As a dividend stock, it has lost value since May, but with exposure to housing and automobiles, two recovering markets, a turnaround in the stock’s fortunes looks likely. With EPS of $1.72 and a 4.1% yield, it fits the bill of a decent yielding, solid investment.

As I said, these aren’t necessarily the highest yielders in the S&P per se, they are the highest yielders amongst companies that have increased their dividend consistently for 25 years. If income is important from your investments, or will be soon, these may well be a good starting point for re-investment in high yielding stock. If nothing else, the reduced focus out there on this kind of investment suggests to me that it is. I guess I will forever have a contrarian streak!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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