Both the U.S. stock market and the U.S. economy are navigating rough waters right now.
U.S. employment, which had appeared to be moving into rapid expansion, suffered a setback in May, with the economy creating only 41,000 jobs. Meanwhile, the stock market - even with the recent rebound that brought it back to the 10,000 level - remains more than 15% below its cyclical high.
That's been the uncomfortable pattern: One economic report points toward a continued U.S. recovery; the next one points toward recession. Sometimes the contradictory research is separated by a single day, other times they are just hours apart. The resultant uncertainty is whipsawing U.S. stock prices - and is leaving investors feeling shaky.
Fortunately, there is a ready remedy, not to mention a place of refuge, from this kind of grinding uncertainty - high-yielding dividend stocks.
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In bull markets, dividends become more or less irrelevant. When the Dow Jones Industrial Average traded above 14,000 in 2007, very few stocks had a dividend yield of more than 5%. Indeed, at the peak of the 1998-2000 bull market, the yield on the stock market as a whole dropped close to 1%. Investors in such periods are seeking the next excitement, which will provide short-term capital gains. In 2000, they were looking for such excitements mostly from tech companies; in 2007 they were looking for excitement mostly from leveraged positions, perhaps through private equity or hedge funds. Either way, dividend yields played little role.
As we saw after 2000, again in 2008, and are to some extent seeing today, chasing after short-term gains is not the way to maximize investment returns. While you can do well during the bull phase - that is, when all shares of a particular type are rising - the losses that you'll suffer when the stock market turns will be horrendous.
Indeed, those losses can damage your portfolio enough that it never recovers.
On the other hand, dividend-paying stocks provide better long-term returns in all but the most extreme bull markets. If the market is flat or gently rising, the dividends themselves provide a nice yield and possibly capital gains that easily outpace any modest capital gains generated by the broad market. If the markets decline, the dividends provide an excellent protection against outperforming the market on the downside.
A tech stock that trades at a high valuation and that pays no dividend can lose essentially all its value, even without going bust. If you want an example, just look at telecommunications-equipment-maker JDS Uniphase Corp. (NASDAQ: JDSU).
JDS is still a billion-dollar company - its fiscal 2009 sales were nearly $1.3 billion and its current market cap is roughly $2.5 billion - but the firm has still seen its share price plummet from $1,100 a share to the single-digits after the tech-stock bubble burst in 2000.
If a company is solid enough to pay a good dividend - and can demonstrate that it has the wherewithal to continue to do so - a share-price decline of that magnitude is very unlikely. Build yourself a diversified portfolio of similarly solid dividend payers and you'll be exceptionally well protected.
The one difficulty with income investing is figuring out whether the dividend is solid. You need to be very confident of the company itself and of its long-term prospects before investing. Some warning signals that a dividend may be in danger include the following:
In my "Permanent Wealth Investor" advisory service, I refer to companies with high-yielding dividends - whose dividends are safe and stable, and whose stock has some upside promise - as "Alpha Bulldogs." To underscore that this analysis isn't just a theoretical exercise, allow me to take a moment and say that - in my "Permanent Wealth" service - I invest primarily in Alpha Bulldogs, a number of which boast yields that are well into the double digits. Our total return has substantially outperformed the market, and I expect that performance to continue.
Allow me to round out our dividend discussion by suggesting a couple of companies whose high dividends look safe:
Happy hunting…
[Editor's Note: Money Morning readers are often amazed by Martin Hutchinson's profit-focused instincts - as evidenced by his unerring ability to paint a picture of what's to come. He's able to show us the big profit opportunities that are still over the horizon - while also warning us about the potentially ruinous pitfalls hidden just around the corner.
So it's no surprise that Hutchinson has pulled off a string of forecasting successes in the face of the worst financial crisis since the Great Depression - a financial crisis that, not surprisingly, Hutchinson is widely credited for having predicted and warned about well ahead of time.
For those who aren't regular readers, and who might like an additional illustration of Hutchinson's abilities, consider dividends, the icon of the super-conservative investing set, and gold, the safe-haven nest of perpetual inflation hawks.
With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson has managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers.
To take a moment to find out more about the opportunities related to dividends, gold, "Alpha-Bulldog" stocks and The Permanent Wealth Investor, please click here. You'll likely find it time well spent.]
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