I often think of this time as "The Era of the Income-Challenged Investor."
And with good reason.
U.S. Federal Reserve policymakers just voted to keep benchmark short-term interest rates down near zero - and said they're likely to stay there through 2022. Everyone knows the Fed has held rates so low for so long that there are no decent-yielding fixed-income investments - unless you're willing to "pay up" for riskier junk bonds.
That "income-itus" has spread to the stock market, too.
Thanks to the COVID-19 pandemic, 40 S&P 500 companies suspended dividends, and another 18 cut them completely in the first five months of the year - with the worst of it coming during what Barron's nicknamed the "May Dividend Massacre."
But that doesn't mean there aren't great dividend plays available.
They're there - for the taking. Lots of companies pay fat dividends to their stockholders, earn plenty of money regularly to keep paying them, and offer a wealth-building "kicker" called appreciation.
Today, I'm going to tell you about three of my favorites. These are great plays if you're looking to add a nice income stream to your investments. They're even better if you're thinking about retirement - or are already there.
The Secrets of Successful Dividend Searches
I'm going to let you in on a personal secret of mine. When searching for dividend plays in the stock market, the single most important thing I consider is the underlying company's ability to generate steady revenue and profits.
And when I say "steady," I'm talking every single quarter - for years, or even decades.
Profitability comes down to what's left after expenses, debt service, taxes, and depreciation. For me, what's important comes down to "net income available to common shareholders."
From that pool of money comes the dividend.
The next most important thing for me is something called the "dividend-payout ratio." That's the fraction, or ratio, of net income available to common stockholders that goes to pay the dividend.
If you're looking at a dividend-payout ratio of 70%, you're talking about a company whose dividend eats up seven-tenths of the net income available to common stockholders. The remaining net income can be used for investment or growing the business.
While some companies pay a hefty dividend, they may have to use most - and sometimes all - of their net income to pay shareholders. Sometimes companies have to borrow money to pay their dividends.
Let me be clear: I want no part of that game. It means the company's not one of those capable of delivering the "steady" profits I referred to just a moment ago. In other words, the company isn't profitable enough; something's got to give.
And that "something" is probably the dividend.
The three companies I'm showing you here are all giants - each of them very profitable and each with payout ratios less than 85%, which is my limit.
Some companies, including real estate investment trusts (REITs), have payout ratios north of 85%. And that makes sense for them, because that's how they're structured - to pay out nearly all of their net income.
However, most companies aren't structured that way - which is why an 85% payout ratio is the highest that I'm comfortable with. That's because I want the company to have a good cushion for periods of uncertainty - and money to reinvest to grow the business.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.