With inflation slowly easing toward the Fed’s target, we’re nearly guaranteed to see the Federal Reserve continue its trend of lowering interest rates, extending into 2025.
For years, the Fed’s rate hikes created high borrowing costs, but as these rates head lower, this shift opens up a window of opportunity for anyone looking to buy a house, make larger credit-based purchases, or refinance existing debt at more manageable rates.
This change is a welcome breath of fresh air for consumers ready to make moves.
But for a specific group of investors, the news is less than thrilling.
Those who depend on high interest rates for income — especially income investors who enjoyed the relatively stable returns of high-yield savings accounts — may feel the pinch.
For a short period, we could park money in high-yield accounts, earning 5.4% or more.
These were, as some would call them, the “salad days” of easy income investing, where interest alone generated attractive returns.
With rates on a downward slope, these income seekers will once again be turning their gaze toward the stock market.
This pivot means they’ll be hunting for reliable dividends to replace the straightforward returns of high-yield savings.
As these investors scour the market, they should keep one key rule in mind:
They’re everywhere, lurking as seemingly appealing opportunities but posing a serious risk to your capital.
It’s tempting for income investors, especially those with an eye solely on yield percentages, to fall into the trap of “bad dividends.”
Over my 30 years in the investment industry, I’ve seen countless investors get lured in by stocks flaunting high yields, only to watch the underlying stock price bleed their portfolios dry.
So, what exactly qualifies as a “bad dividend”?
Think of these as stocks that boast a high dividend payout, but at the expense of their own stock value.
It’s important to remember that a stock’s dividend yield represents its dividend relative to its share price.
Let’s look at an example: imagine a stock offering a dividend yield of 4%.
If that stock’s price drops 50%, that 4% yield now becomes an 8% yield — not because of increased profitability, but because the stock’s value is in freefall.
In many cases, companies with “bad dividends” resort to cutting their dividends as a last-ditch attempt to save a struggling business.
This situation results in high yields on paper but dismal long-term returns for shareholders as the stock itself declines.
These companies often fail to recover, leaving investors with a shrinking asset and diminished returns.
For an income-focused investor, this is a trap best avoided.
Instead, seek dividend stocks that offer not just yield but also capital growth potential.
A good dividend stock doesn’t only pay out; it’s underpinned by a business model and management that foster consistent growth.
Whether you call it “growth and income” or simply “smart income investing,” the goal is to find stocks that offer a balanced combination of yield and potential appreciation.
For instance, you don’t want to buy a stock yielding 6% only to watch its price drop 7% annually.
As an income investor, you’re looking for investments that deliver returns with the stability to sustain them over time.
Starting with a classic: Altria Group (MO) is a staple in dividend investing, boasting an impressive 8.2% dividend yield.
But Altria offers more than just income. In the past year, the stock’s common shares have grown by 32.5%, making it an income investor’s dream.
Altria is one of the world's largest producers of tobacco and related products, an industry that tends to withstand economic downturns well.
As a consumer staples company, Altria provides essential products that people continue to purchase, regardless of economic conditions.
For investors anticipating an economic slowdown, companies like Altria, Procter & Gamble, and Colgate-Palmolive represent stable, lower-volatility holdings.
Altria has been in a long-term bull market trend since early 2024. Prior to that, the stock experienced a wide trading range, yet it consistently paid out its dividend. Investors can expect continued bullish performance with a potential price target of $65.
This stability makes Altria one of the most attractive dividend stocks on the market.
With its established business model, resilience during economic slowdowns, and an appealing yield, Altria is a staple for dividend investors seeking both growth and income.
Verizon (VZ) is another powerhouse dividend stock with a reputation for generating steady cash flow, crucial for supporting its 6.1% dividend yield.
The company brings in roughly $19 billion in free cash flow annually, of which $11 billion is returned to shareholders as dividends.
Verizon’s dividend track record is impressive: management has raised it for 18 consecutive years.
While this doesn’t match the likes of Coca-Cola in terms of longevity, Verizon’s steady payout remains highly attractive.
Shares of Verizon have surged by 24% year-to-date, entering significant bull market territory and pushing past $50.
Like many large corporations, Verizon has had its ups and downs.
The company faced a technical bear market in 2022 and 2023 following its acquisitions of Yahoo and other ventures that didn’t pan out as hoped.
However, by narrowing its focus on its core business — cellular networks and home internet — Verizon has managed a strong comeback.
This pivot toward what it does best has returned the stock to a bull market trend since late 2023.
For investors seeking both income and growth, Verizon remains a top choice.
With a robust dividend yield and a return to long-term growth, Verizon presents a solid “growth and income” candidate, perfect for income-seeking investors looking for reliability.
If you’re looking for a diversified approach to dividend investing, the iShares Select Dividend ETF (DVY) provides an attractive solution.
With a dividend yield around 3.5%, DVY doesn’t double the inflation rate, but its diverse holdings offset single-stock risks.
DVY includes 99 different stocks, with top holdings such as Altria (MO), AT&T (T), and Verizon (VZ) making up about 20% of its value.
By spreading your investment across multiple dividend payers, DVY lowers the risk of relying on one or two stocks for income.
Year-to-date, DVY shares have risen 17%, matching the popular Nasdaq 100 (QQQ) while maintaining lower volatility and offering a steady dividend.
Though DVY, like other assets, faced a bear market in 2022, it returned to a bullish trend in mid-2023.
Over the past five years, DVY has generated an impressive 160% return, showcasing the long-term power of diversified income investing.
As the Fed eases rates, income-focused investors will increasingly rely on the stock market for yield.
This shift makes dividend investing more crucial than ever.
A well-chosen dividend portfolio not only replaces high-yield savings accounts but can also provide capital growth, enhancing the total return.
Dividend investing isn’t just about high yields; it’s about selecting stocks that grow over time.
Avoiding “bad dividends” and focusing on companies with robust financials, strong management, and enduring business models can set investors up for long-term success.
Whether it’s through individual stocks like Altria and Verizon or a diversified ETF like DVY, dividend investing can offer stability and growth for income-seeking investors in a low-interest-rate environment.
