Lower For Longer: Dividend Stocks Are Still The Place To Be

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I'm the lucky dad of teenage boys. Financial markets remind me of teenage boys: brilliant, rewarding, inspiring at times and other times frustrating, erratic, and just plain stupid. I've found the key to dealing with both is consistency, clear objectives, and conviction.

And although many market observers may describe the language of the Federal Reserve as vague and obtuse, I'm starting to think that Dr. Yellen and Company share my "the market as teenage boy" philosophy. They want rates to return to some form of normalcy, but the economic conditions must warrant the action first. They waited and waited before finally taking action in December 2015, raising the base federal funds rate a quarter of a percent. This signaled a desire to return to more realistic interest rates while reiterating that it will be an exceedingly long process to get back to their target rates.

And the market, like a teenager, pouted as the S&P 500 pulled back 11% from December 2015 to February 2016.

Do we expect the market to go down when the fed raises the rate again? Maybe not as much, as perhaps it's "learned" the consequences. Then again, I'm an optimist.

No, any pullback will be dictated by actual economic fundamentals. In any case, rates will remain at historic lows.

As the clock winds down on 2016, many pundits feel that another small hike is coming towards the end of this year followed by no further action for another 12 months. I lean towards that camp. So, although I believe rates will rise ever so slightly, they will remain lower for longer.

Back to the pundits: Many equity gurus are calling for a slowing or even a significant pullback in the performance of dividend-paying stocks, possibly signaling a rotation back into growth stocks. I disagree. In a suppressed rate environment, dividend-paying stocks will continue to lead the way. Here's why:

Annualized Total Returns

1 Year 5 Year 10 Year
Dividend-Paying Equities 22.24% 16.46% 7.07%
S&P 500 3.67% 11.40% 4.56%

Source:Dow Jones Dividend Select Fact Sheet 2016, Morningstar

Comparing the annualized total return performance of the Dow Jones Select Dividend Index versus the S&P 500 Index on a one, five, and 10-year basis, the DJ Select Dividend returns 55% more over the longer term.

Even more impressive is the annualized performance of dividend-paying stocks when stacked up against U.S. Treasuries.

Annualized Total Returns

1 Year 5 Year 10 Year
Dividend-Paying Equities 22.24% 16.46% 7.07%
7-10 Year U.S. Treasury ETF 4.26% 3.33% 5.95%

Source:Dow Jones Dividend Select Fact Sheet 2016, Morningstar

Using the iShares 7-10 year U.S. Treasury ETF (NYSE: IEF ) as the proxy, dividend stocks beat bonds by 19%.

So is the dividend run over? Not by a long shot. Here are three stocks worth looking at.

CA, Inc. (Nasdaq: CA ) - Formerly Computer Associates, CA is the "forgotten" big tech stock. Focusing on enterprise computing solutions, the company develops application solutions for customers across multiple platforms including cloud, mainframe, and mobile. With a market cap north of $13 billion and annual revenue over $4 billion, the company consistently deliver EBITDA (earnings before interest taxes depreciation and amortization) margins between 37% and 40%. Shares look cheap at around $32.00 with a forward P/E of 12.7 and a 3.16% dividend yield.

Pfizer, Inc. (NYSE: PFE ) - Despite fears of slowing in the big pharma space due to Obamacare-induced regulatory pressure and post-election blowback, one of the world's largest drug manufacturers continues to reinvent itself thanks to cutting edge research and product breakthroughs in immunotherapy-focused biotechnology. Sales are expected to grow 8.5% year over year from $48.8 billion in 2015 to nearly $53 billion for 2016 with earnings per share ( EPS ) popping 120% to $2.46 for 2016 from 2015's $1.11. Shares trade around $32.50 with a modest 13.2 forward P/E and a 3.67% dividend yield.

Entergy Corp. (NYSE: ETR ) - Lighting up Louisiana, Texas, Mississippi, and Arkansas, this big regulated power producer is one of the few bargains I've found in what many consider a tired, overextended sector. Forecasts call for 77% EBITDA growth to $3.48 billion over 2015's $1.96 billion. Shares trade at a 40% discount on a forward P/E basis to the Dow Jones Utility average: 18.39 versus 10.96. The stock is priced near $73 with a 4.55% dividend yield.

Risks To Consider: Although dividend paying stocks have clearly outperformed over a longish period, sector rotation is a normal market occurrence. Always expect volatility. However, these three stocks currently trade at an average discount of 9.73% to their 52-week highs. This should serve as a decent buffer against unexpected shifts.

Action To Take: While it seems that sentiment toward dividend stocks maybe be turning somewhat bearish long-term, consistent data shows otherwise. Dividend-paying stocks are still a viable alternative for investors seeking income and a decent longer term total return. As a basket, these stocks trade at an average forward P/E of 12.28 which is a deep 32% discount to the forward P/E of the S&P 500. With a blended dividend yield of almost 3.8%, investors could enjoy 5 year total returns in excess of 17%. Not exactly a bearish forecast.

P.S. Interested in finding more great dividends ? While you might be tempted to buy only the highest-yielding dividend stocks... please DON'T. Because research proves that one special group of dividend-payers outperformed all others over a period of 87 years. And once you find this dividend "sweet spot" you can earn average yields of 9.9%. I'm talking about a special collection called... Full story ...

Disclosure: Adam Fischbaum holds shares of CA in client and family accounts.

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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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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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