With inflation closing in on the Fed’s target we’re almost guaranteed to see the Fed continue their interest rate lowering through 2025.
The news is great for anyone looking to buy a house, make larger purchases with credit or refinance debt. But for a large group of investors, the news isn’t good.
High interest rates have pampered those investors looking for income.
For a small period, we were able to park money in high yield savings accounts earnings 5.4% and higher. We’ll call those the “salad days” of income investing.
With lower rates on the horizon, those income foragers are going to be looking for income solutions from the stock market again.
There’s one rule that I always like to remind investors of when it comes to investing in high yield stocks…
They’re all over the place, and they’re a trap for investors that are looking at one thing: a stock’s yield.
Over my 30 years in the business, I’ve had investors ask me about hundreds of bad dividend stocks.
What’s a “bad dividend”?
Bad dividend stocks are those that pay an attractive dividend only to lose capital. Remember, a dividend yield reflects a stock’s dividend in comparison to its price.
Example, a stock pays a dividend yield of 4% today can turn into a dividend yield of 8% when the stock price declines 50%. It sounds like it could never happen, but it happens all the time.
Cutting a stock’s dividend is normally a last-ditch effort to turn a flagging company around. For that reason, there are plenty of high yielding stocks that consistently lose more than their dividend value a year. Bad dividend stocks.
Just remember that you’re investing in a dividend. A stock that’s business model and management are going to continue to grow, both the dividend and the stock price.
Call it growth and income or whatever you like, just avoid the situations where the income stock that you buy for a 6% yield loses 7% a year. Trust me, there are a lot of them out there.
Right out of the gate, Altria Group (MO) stands out because of its 8.2% dividend yield.
Add the last year’s growth of the common shares of 32.5% and you’ve got an income investor’s dream.
The company is one of the world's largest tobacco producers as well as marketers of tobacco, cigarettes, and medical products in the treatment of illnesses caused by tobacco.
Altria is categorized as a consumer staples company, which makes it attractive for those investors that are expecting a slowdown in the economy over the next few years.
Consumer staple companies like Altria, Proctor & Gamble and Colgate-Palmolive (CL) are considered lower volatile holdings during a recession as demand for their products often remains relatively steady.
Alrtia stock has been trading in a long-term bull market trend since the beginning of 2024. Before that, the stock spent three years trading in a wide trading range, all the while paying that dividend.
Considered one of the best dividend stocks out there, Altria has a bullish outlook with a potential price target of $65.
Love them or hate them, Verizon (VZ) does one things very well, they generate cash flow. That’s always good for a company boasting a dividend yield of 6.1%.
The company shows free cash flow of $19 billion, $11 billion of which they return to shareholders in the form of a dividend.
Verizon’s management has increase that dividend for 18 consecutive years now. There are companies that have gone much longer that that – Coca Cola for one – but Verizon’s payout remains attractive in comparison.
The stock has been on a growth streak as shares are in a significant bull market trend.
Year-to-date, Verizon shares are trading 24% higher as they make their way to new all-time high territory with a push above $50,
Verizon spent much of 2022 and 2023 trading in a technical bear market after the company’s foray into Yahoo and other business ventures. For what it’s worth, competitor AT&T did the same with DirecTV.
Narrowing the company’s scope and returning to the growth and development of the cellular network and home internet products has paid-off with Verizon shares returning to a long-term bull market in late 2023. That trend has carried the stock 24% higher since.
With their 6% yield and significant growth potential, Verizon is a strong growth & income candidate.
OK, it doesn't double the inflation rate, but its diversification factor makes up for that quality.
The iShares Select Dividend ETF (DVY) is an exchange traded fund that holds 99 different stocks. The top 10 holdings of the ETF make up about 20% of the fund’s total value. Thos include names like Altria (MO), AT&T (T), and Verizon (VZ).
The diversification of this income alternative removes the single-stock risk of holding just a few dividend yielders in a portfolio.
That diversification doesn’t mean that the ETF can’t fall on slow growth periods or volatility, just that it is smoothed out over time.
The ETF yields around 3.5%, still much higher than inflation, and has displayed strength in the current market conditions.
Year-to-date, DVY shares trade 17% higher. That return matches the ever-popular Nasdaq 100 (QQQ) for the year with less volatility and the benefit of a dividend.
DVY shares sloughed through a short bear market in 2022 along with the rest of stocks and ETFs but returned to a bull market trend in mid-2023.
Over the longer run, the DVY shares are posting an impressive 160% return in the last five years.