The Federal Reserve’s latest rate cut is continuing to put income investors in a tough situation. With many bond yields at 0%, the message to income investors is clear. Put your money in income-generating equities (read: stocks). And this is bringing dividend stocks back into focus.
However, like all equities, not all dividend-paying stocks are created equal. There are three sectors of dividend stocks that are outpacing the broader market. We’ll take a closer look at each sector now.
Total Return in the 12 months ending 10/22/19 – 32.0%
Weighted aggregate dividend yield – 2.99%
The real estate sector is expected to see earnings growth double from this year to the next. When looking for dividend stocks in the real estate sector, investors have two primary options. The first are real estate investment trust (REITs). REITs are popular because they offer investors the benefits of investing in commercial real estate with the convenience of investing in a publicly-traded stock. REITs are required to distribute 90% of their taxable income to shareholders as dividends. This means that REITs typically have higher dividend yields than other dividend stocks.
One area that dividend investors need to pay close attention to is taxes. To begin with, REITs pay property taxes which can be as high as 25% of their total operating expenses. And investors are required to pay taxes on dividends. And a large chunk of that dividend income is taxed as ordinary income. This means the rate is usually considerably higher than the 15% taxable dividend rate.
The second option for dividend investors in this sector is real estate services that include financial, insurance, sales, and development. A sales and development stock like Re-Max (NYSE:RMAX) is considered to be a pure-play real estate stock and for that reason may be more desirable for investors.
Total return in the 12 months ending 10/22/19 – 22.8%
Weighted aggregate dividend yield – 3.07%
When some investors think about dividend stocks, utility stocks often come to mind. The thing about these stocks is that the same reason they appealed to your grandparents can be the same reason they deserve a place in your portfolio.
Utility stocks are the ultimate defensive stocks. Defensive stocks are those that tend to perform well in any economy. Consumers need their power, water, and natural gas in any economy. Or, putting it another way, consumers may skimp on other discretionary spending, but they have to continue to pay their utility bills. For utility companies that provide a consistent source of revenue. However, because many utilities are virtual monopolies in the cities and municipalities in which they operate, the rates that these companies can charge are subject to regulation.
The dividends of utility stocks are incredibly safe. Many of the top companies in this sector have a long history of not only paying a dividend but increasing their dividend. In addition to offering attractive yields, many stocks in this sector have attractive payout ratios. The payout ratio is the amount of earnings that are paid out as dividends and expressed as a percentage. A lower payout ratio may be a sign that the company is reinvesting the majority of its earnings back into the business for growth. On the other hand, a high ratio can mean that the company does not have other growth options. In general, utility stocks tend to have a payout ratio between 50-65%. However, an outlying high or low ratio does not necessarily make a stock good or bad.
Some of the top-rated dividend stocks in 2019 are NextEra Energy (NYSE:NEE), Duke Energy (NYSE:DUK), and Enbridge (NYSE:ENB).
Total return in the 12 months ending 10/22/19 – 16.1%
Weighted aggregate dividend yield – 1.47%
Information technology stocks are not frequently considered to be great dividend stocks. One reason is that they are considered to be more volatile than stocks in other sectors. That can be true. However, it is also changing. There are a number of “tech” stocks that are moving into a more mature phase of their business cycle. Companies like Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) used to never offer dividends, but they do today. There are even some industry experts that suggest Amazon (NASDAQ:AMZN) may begin to offer a dividend, particularly as the stock comes under regulatory scrutiny.
Information technology dividend stocks tend to have smaller dividend ratios. However, investors are more likely to have a better opportunity for capital growth with these stocks. This can be attractive for investors that may not need the dividend income right away as they can get additional growth by reinvesting the dividends.
Companies Mentioned in This Article