You Can't Fake Sending out a Check (MCD)

Everyone loves income. It used to be that publicly traded companies paid dividends as a matter of policy - to reward the owners of the company for taking an equity position in the company.

In return for this equity, investors would receive cash flow every quarter in the form of a dividend. In fact, according to a recent article in Forbes Magazine, since 1926 dividends "...have accounted for more than one-half of the total return from investing in stocks."

These days, many companies don't pay dividends, and very few pay a dividend that's worth our attention. But the companies that CAN pay dividends frequently are among the best in the stock market.

Just look at the strength of stocks like McDonald's Corporation ( MCD ) - an amazing performer over the past few months despite a tumultuous market. The dividend also remains very attractive, offering a competitive yield of 2.7 percent.

Dividend paying stocks perform because a dividend payment is one thing a corporate accountant can't fake on the balance sheet. Earnings, wages, revenue, taxes, business write-offs - all of those numbers can be adjusted.

But you can't fake sending out a check.

During today's period of market uncertainty it is all the sweeter to regularly recoup a portion of your initial investment in the form of dividend income.

It makes it easier to wait for the stock market to bounce back.

While I love McDonald's, it's really the smaller companies that offer the best total returns in the stock market - including dividend payments.

You might not believe this, or have to stomach to act when stocks are falling like they have been lately. But I can't stress enough that this is the time to keep your eyes open for beaten down small caps that pay healthy dividends.

The market has already priced in a significant chance of recession - much more than was forecast a couple of months ago. Does this mean you should hide your money under the mattress?

Absolutely not - it actually means you should be averaging into small cap dividend stocks.

This is because small cap stocks tend to lead their larger-cap brethren coming out of a recession. The chart below was calculated from historical data, and shows that small cap stocks (the orange bar) have historically led mid and large-cap stocks coming out of the mid-point of a recession.

Whether we are in a recovery right now - or if we are headed back into a recession - won't be known for months, if not years.

But we're far less than three years from the mid-point of the most recent recession. That indicates that small companies are still poised to outperform. And after a dramatic decline in stocks, small caps will be the asset class to rise further, faster.

Stocks have fallen hard in recent weeks. Many small caps have tumbled 20, even 40 percent. Several strong dividend paying small caps have fallen much less - but even with a 10 to 20 percent decline are now paying yields far above those offered by the bulk of fixed income alternatives.

I'm not suggesting that small cap dividend stocks don't come with some risk - they absolutely do. But for money that you don't need within the next five years, market corrections like the one we are currently in represent an extremely compelling opportunity to pick up shares that will pay you dividends for years to come.

After all, if you were buying stocks in the last three months, shouldn't you be buying now when they're a heck of a lot cheaper, and pay you more in the form of higher yields to own them?

You don't need to buy all the stocks you'd like to own today, or tomorrow. But it would be 'risky' to not buy any at all.

Buy in tranches, a bit this week, some next week and maybe more in September. Look to buy on days when everybody else is selling.

This will average out your cost, and give you the security of knowing you don't have to pick 'the bottom' to cash in on great dividend paying small companies.

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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