With the recent rout in various commodities and global growth concerns now creeping back into the headlines, investors are understandably getting nervous. After all, it was only a few years ago that the Great Recession took hold. With that in mind, U.S. Treasuries have once again become the asset class du jour as investors flocked to funds like the iShares Barclays 7-10 Year Treasury ETF (NYSE:IEF).
However, with yields on fixed income investments such as bonds, CD's and money market funds painfully low, they offer now real solace to investors looking for any sort of return. Luckily, investment bank Barclays (NYSE:BCS) has some other advice for investors to weather any approaching storm- dividend stocks.
Dividends, Dividends, Dividends
According to a new research note from the British bank, stocks that pay steady and rising dividends are the place to be as worries about the health of the global economy begin to take hold. Barclay’s notes that “stocks in the sweet spot of monetary policy- high quality, high dividend yield, low volatility- are supporting the broader market.” A group of four sectors- including healthcare, utilities, energy and financials- are each outperforming the S&P 500 by a wide margin month over month. The bulk of that outperformance has come from the group’s dividend payments.
SEE: Why Dividends Matter
There’s certainly a method to Barclay’s madness.
Dividends can help smooth out returns as these payments can help cushion the downside in falling markets. Reinvesting those payments can help enhance returns when the market rights itself. According to data compiled by Ned Davis Research, over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually. More importantly, they outperformed non-payers by nearly 8% each year.
Blue chip stocks with strong corporate balance sheets and cash flow are already paying much more than treasuries. Yet, companies with a history of raising payouts are especially warranted. Unlike a bond which pays a fixed rate, with stocks you could potentially get a higher dividend year after year. Yields on the 10-year Treasury bond recently fell below 2%. When accounting for inflation, that equates to a less than 0% yield.
Overall, Barclay’s predicts that these “Bond-like Stocks” will continue to outperform over the longer haul and over the next few months as global growth concerns could come to fruition.
SEE: Banking On Blue Chip Stocks
Finding Those Bond-Like Stocks
With market volatility rising, now could be the best time for investors to add strong dividend payers to a portfolio. One of the best choices could be the Vanguard Dividend Appreciation ETF (ARCA:VIG). The fund is an index of stocks that have raised dividends over the last 10 straight years. The fund’s holdings- such as Coca-Cola (NYSE:KO) and Chevron (NYSE:CVX) -are exactly the kind of companies that Barclays is talking about. These large-cap names with strong global footprints are most likely to provide sustained growth during troubled times. VIG has a rock bottom expense ratio and currently yields 2.17%.
Another broad buy could be iShares Dow Jones Select Dividend Index (ARCA:DVY). The fund tracks a basket of dividend stocks. However, the iShares fund is bit more concentrated at 101 holdings and focuses more on current yield rather than dividend growth. As such the ETF produces a 3.93% dividend. Expenses are higher for the fund at 0.40%. Similarly, investors looking for more global muscle from their dividend investments could use the iShares Dow Jones International Select Dividend Index (ARCA:IDV). This ETF follows an analogous index to DVY, but shifts that focus to firms located outside the U.S.
Finally, one of Barclay’s biggest recommendations for investors looking for bond-like stocks is in the utilities sector. Even in times of uncertainty, consumers, businesses and municipalities still need to power their operations and cool their homes. Water still needs to flow and electricity hums through power lines. That makes firms like American Electric Power (NYSE:AEP), Consolidated Edison (NYSE:ED) and DTE Energy (NYSE:DTE) powerful dividend payers through thick and thin.
SEE: Trust In Utilities
The Bottom Line
With concerns about the global economies health, investors are once again facing a quandary- how to balance portfolio growth with safety. Luckily, they have a powerful tool at their disposal. By betting on large-cap stocks that pay healthy growing dividends, portfolios should be able to navigate whatever the market throws at them.
At the time of writing, Aaron Levitt did not own shares in any companies or funds mentioned in this article.
Personal FinanceSix reasons why some advisors recommend dividends and why sometimes this may be unsound advice.
MarketsUnderstanding dividends and how they work will help you become a more informed and successful investor.
Investing BasicsIf a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
Investing BasicsDividend payments may reveal information about the future prospects of a company.
Investing BasicsDiscover what makes blue chip stocks such attractive investments.
Fundamental AnalysisSeven words that are music to investors' ears? "The dividend check is in the mail."
Investing BasicsFind out how a company can put its profits directly into your hands.
Investing BasicsIn specie describes the distribution of an asset in its physical form instead of cash.
Mutual Funds & ETFsThese three transportation funds attract the majority of sector volume.
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
The frequency with which mutual funds pay capital gains varies. However, funds that generate a profit within a given year ... Read Full Answer >>
Though it is more common for dividends to be paid quarterly or annually, some stocks do pay monthly dividends. Dividends: ... Read Full Answer >>
Whether dividends paid on stock are considered an asset depends on which role you play in the investment: the issuing company ... Read Full Answer >>
Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>
Distribution of dividends reduces the net asset value (NAV) of mutual fund shares. However, this doesn't mean that fund investors ... Read Full Answer >>
Dividend income is taxable but it is taxed in different ways depending on whether the dividends are qualified or nonqualified. ... Read Full Answer >>