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In 25-plus years as a professional trader and investor, I've seen everything.
But there's still one thing that "gets" me every time – it just kills me to see investors chasing down "safe dividend stocks" and paying for that yield.
And by "paying," I mean, losing a huge chunk of their portfolio after those dividend stocks crash and burn.
I see it all the time, with some really popular investments. Take the iShares 20-year Treasury Bond ETF (NASDAQ: TLT) – a very popular "income generator" for investors. It pays about 1.6% in dividends. Or the Pimco Total Return Fund (MUTF: PTTRX); that pays 2.46%. It's one of the "gold standards" for income funds.
But there's a problem with both – I'll show you exactly what that is in a second.
If you're in any of these stocks right now, don't worry: I'm going to show you how to find the real dividend advantage and, you guessed it, name the ticker of the best, safest dividend stock on my screen today.
Most "Safe Dividends" Aren't Safe at All
A company or fund may very well pay an attractive, reliable dividend. I mean, you can't deny TLT and PPTRX shell out payments that usually at least beat inflation.
But then there's that problem I mentioned: the share price appreciation itself – or should I say, the lack of appreciation.
Since the beginning of 2021, TLT shares have lost more than 13%. PTTRX has lost 3.8% since the beginning of the year and 2.6% in the last 12 months.
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Believe it or not, this is the nature of the income beast. Values go lower as yields go higher.
This relationship sends a lot of investors out into the market to "forage" for yields. Why not? It's the reasonable response, particularly with interest rates being what they are – and have been for the past 10 years.
But beware, because high-yielding stocks are often no better. Back in the early 2000s, Frontier Communications Corp. (OTCMKTS: FTRCQ) was hailed as a "dividend diamond" because it paid an eye-watering 15%. Too bad that yield came at the cost of a plummeting share price. I knew a guy once, let's call him "Mr. FTRCQ," who, dividend dollar-signs in his eyes, chased down the shares and very quickly lost half his principal.
But it doesn't have to be that way at all – you can have your yield and appreciation, too…
How to Find the Best Dividend Stocks
Clearly, I never chase high dividends. Instead, I look for safe yields that offer steadily increasing share prices, too.
Just follow some simple, easy-to-remember rules of thumb.
First, check the stock's movement: Is it bullish or bearish?
Is the stock above or below its 20-month moving average (MA600)? A lot of investors think that they're going to hold their dividend yielders for the long run, which means that they don't have to worry about whether the stock is in a bull or bear market.
Not true. I liken this to buying a lemon of a used car when you're getting ready for a long-haul drive. It's going to cost you. Spend the money, buy quality.
Second, make sure the stock isn't crowded.
Don't buy the dividend yielders that the entire market is buying. If you hear the name on CNBC… think twice.
Why? Because if things go wrong, you'll watch the stock hurtle into the abyss as the entire market sells something that they thought was safe.
Third, buy revenue.
This is a simple way of saying "buy quality." It's rare that you hear me talk much about fundamentals or place a heavy emphasis on them; as I always say, bull markets are driven by speculation, not fundamentals.
That said, it's absolutely true that dividends are paid by fundamentals, not speculation. A company that's successfully beefing up its bottom line, thinking beyond the next earnings call, will probably do the same for your bottom line, and the best CEOs know to treat their shareholders like business partners and pay them.
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And finally, don't be afraid to sell your dividend-payer if you're not seeing the kind of performance you want.
Back in 2003, "Mr. FTRCQ" rode that stock all the way into despair. The company filed for bankruptcy in 2020. That 15% dividend was good money after bad.
Make sure that you keep that in mind.
Sure, selling a dividend-payer from your portfolio may cost a little in capital gains – or you may be able to pull off a tax loss harvest. Either of those is much better than trying to add up the pennies that a dividend makes for your account against the dollars that the same stock has lost.
As the saying goes, don't step over dollars to chase pennies. Grab these shares instead…
Here's the Best, Safest Dividend Stock Trading Today
I used my proprietary screener to pick out 15 solid, safe dividend payers that offer yield and good prospects for appreciation – you can find them all in this chart at left.
But I think the best one on this list is Exxon Mobil Corp. (NYSE: XOM). Now, if you've been with me for a while, you know how bullish I am on clean energy – it's the future. But you can't deny Exxon's performance over the past six months as oil demand picks up and the recovery kicks into gear. It was one of the first old-school energy companies to show recovery.
The economics are simple: Oil prices keep rising ahead of an increase in global demand. In addition, inflation – or "reflation" – pressures are also providing a tailwind for commodities like oil and other energy sources.
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The market was quick to throw these companies out years ago as crude prices dropped and briefly turned negative. The oil trade was the complete opposite of crowded as analysts and investors abandoned the sector. Things only got worse when the clean energy movement got some traction in 2020, but in the meantime, it's become clear that the old-line fossil energy companies are (mostly) developing renewables strategies of their own – over and above the increasing demand for oil and oil products. If you can't beat 'em, join 'em. I don't think fossil fuels have gone the way of the dinosaurs just yet.
The chart above is beautiful, and it shows a stock moving from strong to stronger.
XOM broke into a long-term bullish trend months ago as oil prices started to rise. Now, this giant is starting to wake up again as revenue bottomed in 2020 and earnings are leading analyst expectations.
This is definitely a stock you want to be long on in 2021, and I'm looking out for signals to boost the gains from appreciation and dividends with bullish trades.
Trading stocks using options can really kick the profit potential up a notch. Most folks know when they buy puts they're expecting the stock to drop – that's level 1 stuff. But when one buys puts, they're usually very bullish on a stock – and they're looking for the chance to own it cheap. In theory, with the right strategy, it's entirely possible a put seller could end up owning a fantastic $50 stock for $35 a share. And it's also possible to bank fast income from the premium. My colleague Tom Gentile recently used a similar strategy to set himself up for his most successful year yet – 23 wins, ZERO losses since April 2020. He can fill you in on the details here…
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Straight-Up Profits. He also contributes to Money Morning as the Quant Analysis Specialist.