Dividends4Life: Finding The Better Dividend Stocks

Finding The Better Dividend Stocks

Posted by D4L | Thursday, July 18, 2013 | | 0 comments »

The highest yielding segments of the stock market have rightfully been smacked around since interest rates started to rise off the mat in late May. Not only does a high dividend yield become less attractive when bond rates rise, but a lot of defensive high yielders have traded at a mismatch for the past few years: rising PE ratios despite slow earnings (and slow dividend) growth. Ignoring that mismatch is harder now, given there’s a more competitive alternative in higher bond yields and the simple fact that seems to keep getting lost: if the Fed is considering a taper, that suggests a sentiment shift away from defensive and into cyclical stocks.

Just look at the performance of two leading utility sector ETFs; since the end of May Vanguard Utilities ETF (VPU) and iShares Dow Jones US Utilities (IDU) have fallen twice as hard as the broad market, as seen in a stock chart. The dividend payout ratio for the S&P 500 was 36% at the end of the second quarter. Even with slowed-down earnings growth there’s still plenty of room for more dividend growth. The long-term average payout ratio for the S&P 500 is 52%. Moreover, last we checked, corporate America was still awash in record cash, suggesting there’s no reason to expect dividend growth to suddenly take a U-turn.

Source: YCharts

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