Best Time To ‘Load Up’ On High Dividends


Co-produced with Treading Softly

Years ago I remember watching an old commercial put out by the Ontario government about water safety. It was all about avoiding thin ice. Take a moment to watch it here!

So, here’s the question, is now a good time to buy dividend-paying securities? “It’s no mystery”, or at least it shouldn’t be for those investors who have cash at the ready, and for those investors receiving dividends on a regular basis. Lets quickly examine three strong reasons why times like today are the best to load up on dividend-paying securities.

Low-Interest Rates for Years to Come

The Federal Reserve has forecasted low rates for years to come, Jerome Powell was especially clear on his thoughts about this:

The Fed on Wednesday held its key interest rate near zero and signaled it likely won’t lift it until at least 2022, noting the outbreak “will weigh heavily on economic activity” and “poses considerable risks to the economic outlook.”

“We’re not even thinking about raising rates,” Fed Chair Jerome Powell said in a virtual news conference. “We’re not even thinking about thinking about raising rates.”

Source: USA Today – June 10th

Currently, the Fed rates are near zero and the Fed has no desire to move into negative territory.

“There’s no clear finding that it actually does support economic activity on net, and it introduces distortions into the financial system, which I think offset that,” Powell said. “There’re plenty of people who think negative interest rates are a good policy. But we don’t really think so at the Federal Reserve.”

Source: CBS News – May 18th

The prime rate drives lending activity rates and Treasury note rates looking forward.

Treasury notes currently offer extremely low yields as well:

Chart

The lower the prime rate, the lower the cost of lending, which leads to lower savings yields from banks to consumers. With all these various “safer” sources of yield essentially non-existent and forecasted to be dry wells for years to come, investors have only one major place to find it: the market.

The S&P 500 (SPY) is showing low yield for the average investor as well:

Chart

Essentially investors are forced to move into individual dividend-paying securities or funds to find live-able yields. As more investors world-wide seek for yield, over time the hunt drives prices of dividend-paying securities higher. Investors looking for yield should act before others realize that low-interest rates are here to stay for years to come.

Market Turbulence

The second major factor that will boost dividend-paying securities is market turbulence. The more volatile the market, the more investors want something to anchor their portfolio to. Returns come in two forms, capital gains or dividend income. When the market is choppy, investors who previously relied on capital gains alone often find themselves shifting additional funds to safer waters – where dividends roll in regardless of price.

The market often sees various waves of consolidation, where traders lock in gains and move them to safer waters until they feel they can lock in new gains elsewhere. This causes a ripple effect of various securities flying high rapidly, crashing, and climbing again. These waves in various securities can change day to day as various sectors climb and fall apart from one another.

These gains are often funneled to dividend-paying securities where they can be used to create additional safe income. Likewise, we can invest in high-quality dividend payers who see sell-offs and lock in years worth of income at higher than historical yields.

On the other hand, market turbulence provides valuable fertile ground for dividend reinvestment. When a security trends sideways, we can more readily see the benefit of reinvested dividends.

Chart

From June 2016 till Feb 1st, 2020, KNOT Offshore Partners (KNOP) largely saw its overall share price trend sideways. It was largely range-bound as investors bought heavily on dips and sold heavily when it climbed. What this provides us is a textbook case where dividends reinvested readily and rapidly generated outsized returns.

KNOP investors who reinvested their dividends saw large returns and strong dividend income growth from their investments. By buying during these times of turbulence that may continue to years to come, you can likewise use dividends to generate strong returns and high levels of new income.

Bear Market Deals

While the major indexes have recovered from their initial bear market drops many individual securities have not. How so? Large technology securities have carried the indexes upward while many smaller names have languished.

ChartData by YCharts

Big names like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Facebook (FB) have essentially lifted the market indexes by their sheer size and strength. Those indexes that are more heavily weighted towards them have risen higher and stronger.

The biggest mistake many investors make is comparing their performance versus the indexes when their investment style does not match the index. This is also why so many CEFs do not compare themselves blindly to the S&P 500. It is a fool’s errand.

Many high-quality dividend payers are still well below their beginning-of-the-year values – making them attractive purchases in the short-term and great holdings in the long-term.

ChartData by YCharts

For example Realty Income (O) yield 4.8%, W.P. Carey (WPC) 6.3%, Lazard (LAZ) yield 6.9%, and Cohen & Steers Total Return Realty Fund (RFI) yield 8.0%, are all strong dividend-paying securities. These firms have a history of paying out dividends and offer strong capital gains opportunities as well.

Note: LAZ issues a K-1 at tax time. Yields as of June 27th.

Investors who followed our previous reports on these names have already seen some strong returns.

O:

Chart

WPC:

Chart

Now is still a great time to load up on dividend stocks trading well below their pre-fall prices. These offer significant upside and long-term income generation. Should the market see another meltdown over Coronavirus fears or a pricing correction, we expect that continued strength of technology stocks will fade. If those large firms see negative price action, the market indexes as a whole will struggle. Meanwhile, already oversold names will see strength as their prices correct back to normal values.

Bullish on Equities

We have made the case in a previous report posted early in June stating why we are bullish on equities despite the recent run:

Despite the big rally, we remain bullish on equities in the medium and long run, and we will possibly see new market highs relatively soon. You cannot fight the massive amount of liquidity that’s in the market today. Furthermore, there’s no better alternatives (or investment opportunities) than equities. With interest rates being so low, and expected to remain so for the foreseeable future, we believe that solid dividend stocks that offer a high level of income are set to strongly outperform.

Source: “Why We Are Bullish On Equities”

Conclusion: Buy.

Currently, the market might be overbought in some sectors such as technology, however high-quality, long-term dividend investors are trying to sift through opportunities to buy up cheaply priced dividend stocks to fund their lives. We are seeing prices we may never see again. The pressure to break upwards in the dividend-paying realm is marking this as a prime time to put some cash to work.

Interest rates will remain low, pressuring the usual “safe” havens for yield seekers. Any market turbulence will drive capital-gains-focused investors to anchor some of their return expectations to dividend-paying securities while simultaneously providing a prime market to reinvest your dividends. Lastly, many dividend payers are still on solid footing but trading well below their pre-fall prices. These types of sales don’t last forever. When the market is cheap buy. When it is expensive, sell. Right now, dividend-paying securities are cheap and many non-dividend-paying names are expensive.

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Disclosure: I am/we are long O, RFI, WPC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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