Considering that the Federal Reserve is still tapping the brakes on raising key interest rates, yield-hungry investors will continue to pour into dividend stocks. And that’s a big reason I expect the market leaders in 2019 to be dividend growth stocks.
Overall, the dividend yield on the S&P 500 hangs around 2%. Remember, most dividends are tax-advantaged and taxed at a maximum federal rate of 23.8%. So, the S&P 500 actually yields more than the 10-year Treasury bond, which yields 2.5% but is taxed at a maximum federal rate of 40.8%.
But before I explain why, let’s take a step back and talk about what exactly a dividend is.
A dividend is the distribution from a company’s earnings paid directly to a class of its shareholders.
It is up to the company as to when (or even if) it is paid.
The dividends tend to be paid out on a quarterly basis, but some companies will also pay a semi-annual or annual dividend.
Company management will always announce when it will be paid – including your deadline to buy the stock in order to receive this payout – and what the dividend will be per share.
Now, the dividend yield varies depending on the company’s actual dividend and where the stock price is at the time. In some cases, you may be looking at a double-digit dividend yield. But as attractive as a double-digit dividend yield may sound, I recommend you pump the brakes before investing. Chasing dividend yields alone can be downright dangerous.
Stocks are not like Treasury bonds or a savings account: There’s no guarantee that you will get your money back. There’s also no guarantee that company will continue paying a dividend. If you choose poorly, you could lose your capital as the stock price falls. Or, that nice juicy dividend could be slashed.
In most cases, dividend yields are tantalizingly high for a reason (the stocks are cheap and rightly so) – and are simply not supported by the fundamental earnings power of the business.
This is why my Dividend Grader is so important. Just like my Portfolio Grader, it uses my proprietary formula to put each stock through a rigorous test, crunching reams of data against a set of criteria I’ve created.
This, in turn, tells us whether the stock is worth investing in or if we should be staying far, far away. Here are a few examples:
As you can see, each company has a huge double-digit dividend yield, but it also receives an “F” rating from Dividend Grader. This is because their dividend trend, dividend reliability, forward dividend growth and earnings are very, very poor.
Now, I don’t want to scare you away from dividends – far from it. I just want you to be aware of the potential risks. Investing in dividend stocks can also be very lucrative. If you get it right, you can make a fortune. Fundamentally strong dividend stocks pack a one-two punch of share price appreciation and a steady stream of income…with payouts that can be twice or five times what you get from a Treasury bond or from a bank.
The bottom line: Don’t just jump into any dividend stock with a high yield. But if you stick with Dividend Grader, my proprietary formula will help you find the best of them and stay away from the worst.
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Source: Investor Place