Should you jump into dividend stocks right now?
This is a question we are often asking ourselves, and there isn’t a straight forward answer.
Most of us aren’t stock market experts, so the uncertainty of the markets can have an effect on us. But when our portfolio includes some dividend stocks, we know for sure that we won’t lose out entirely, even if the markets go swooning tomorrow.
I’m not saying that will happen. In fact, tech giants continue to keep the markets buoyant and the general level of enthusiasm is spilling over into many other sectors. Also, broader indicators from manufacturing, housing and retail are showing a positive trend. Then you have Abbott’s recently-approved portable antigen rapid Covid test that should further pump up the economy.
But the thing is, the exact impact of all these indicators are big unknowns and the recovery appears mostly to be priced in at the moment. Moreover, the next two quarters aren’t likely to bring the big surprises we saw in June, since most analysts are done adjusting estimates. Add to that the fact that we have elections coming up, which typically adds volatility and uncertainty to the mix. So these things can make you a bit nervous.
So you may be considering dividend stocks.
First thing to keep in mind (if you’re looking for dividends) is the yield. That’s what you get by dividing the annual dividend paid by the share price. So if you’re overpaying, the yield will be low. It follows that dividend yields are relatively low in strong bull markets because share prices are on the rise.
The second thing to keep in mind is the growth rate of the company. A company generally pays dividend out of its earnings and retains a portion to invest in growth. So if a company has a very high payout rate, it probably means it’s a slower growing company. This could be perfectly okay for a more mature player, but could signal problems if it’s a relatively young company. Because it could mean that the company sees limited growth opportunity or doesn’t have the necessary competence to pursue the growth that’s available.
Take Zacks #2 (Buy)-ranked The Western Union Company WU for example, which has a 3.77% dividend yield. The company is part of the attractive Zacks-classified Financial Transaction Services industry and its Value Score A and Growth Score B seem to indicate that it’s a good pick. But what I like even more is its long-term growth (LTG) rate of 25.77%.
Compare that with #2 ranked Hoegh LNG Partners LP HMLP, which has a dividend yield of 16.87% but LTG of just 5.24%. It also operates in the Zacks-classified Transportation – Shipping industry, which is in the bottom 20% of 250+ Zacks-classified industries. And sure enough, although it has a Value Score A, its Growth Score is D. This obviously isn’t as good a choice.
Then, consider Lenovo Group Ltd. LNVGY, which has a dividend yield of 8.26% and an LTG of 13.54%. Its current metrics are also good: A Zacks #2 rank with Value Score A and Growth Score A. It operates in the Computer - Mini computers industry (the top 8% of Zacks-classified industries).
I also like Federated Hermes, Inc. FHI, with its Zacks #1 (Strong Buy) rank, Value Score A, Growth Score B, dividend yield 4.46% and LTG 9.92%.
#2 ranked Ternium S.A. TX with its dividend yield of 6.96% and LTG of 8.82% follows. The Value Score A is attractive but the Growth Score C could have been better. Still, it operates in the Steel – Producers industry (top 27%), so things could improve from here on.
Similar is the case with #2 ranked Sun Life Financial Inc. SLF, which operates in the attractive Insurance - Life Insurance industry (top 31%). It has a Value Score A, Growth Score C, dividend yield of 3.84% and LTG of 9.0%.
Investing in stocks is a personal decision, dependent on your investment goals. It’s hard for anyone to say with certainty which ideas will work for you. But the idea is to assess the principles and apply them to your own individual situation.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q2 2020, while the S&P 500 gained an impressive +44.0%, five of our strategies returned +50.9%, +93.8%, +122.2%, +153.0%, and even +156.8%.
This outperformance has not just been a recent phenomenon. From 2000 – Q2 2020, while the S&P averaged +5.5% per year, our top strategies averaged up to +51.7% per year.
See their latest picks free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The Western Union Company (WU): Free Stock Analysis Report
Sun Life Financial Inc. (SLF): Free Stock Analysis Report
Ternium S.A. (TX): Free Stock Analysis Report
Lenovo Group Ltd. (LNVGY): Free Stock Analysis Report
Hoegh LNG Partners LP (HMLP): Free Stock Analysis Report
Federated Hermes, Inc. (FHI): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.