Stick With Dividend-Paying Stocks

STREET SMART - DIVIDEND STOCKS MAY NO LONGER PAY MORE THAN TREASURIES. BUT THAT DOESN'T MEAN YOU SHOULD TRADE IN YOUR STOCKS FOR BONDS.

- James K. Glassman

At the end of 2020, the average stock in the S&P 500 index had a dividend yield of 1.6%, and a 10-year Treasury bond yielded 0.9%. This golden age, when stocks delivered bigger payouts than medium- and even long-term Treasuries, was brief, and it may be gone forever. But that doesn’t mean you should now trade your stocks in for bonds. Not at all.

Well-chosen stocks that pay dividends are solid investments. They are a little less volatile, or risky, than the market as a whole. They produce slightly worse returns in good times but significantly better returns in bad. And dividends don’t lie. Companies can pull all sorts of shenanigans to make their earnings look good in the short term, like pushing expenses into future years. Dividends are real cash sent to shareholders.

Consider “Dividend Aristocrats.” These are large companies in the S&P 500 that have increased their payouts each year for at least the past 25. Currently, there are 64 such stocks that compose the S&P Dividend Aristocrats index, which gives equal weight to each. Over the 10-year period ending December 2, the index has returned an annual average of 13.4%, one-tenth of a point better than the S&P 500. But for the past 12 months, the Aristocrats index has returned 4.3%, while the broader S&P 500 has lost 9.6%. (These calculations include stock-price movements and income from dividend payments.)

You can buy the index through PROSHARES S&P 500 DIVIDEND ARISTOCRATS, an exchange-traded fund with an expense ratio of 0.35%. The ETF is diverse. Holdings include Chevron, the energy giant, yielding 3.1%, and asset manager Franklin Resources, 4.4%. (Stocks and funds I like are in bold.)