The Market is Putting High Yield Stocks on Sale! Time to Buy?
I admit it; this market is making me crazy.
The fear of rising interest rates has pushed down the values of the higher yielding finance related stocks.
The falling price of oil has hit the MLP space hard.
When the market falls as a whole, so do dividend stocks. When the market goes up, the first two fears continue to hold down the higher yielding issues. If the market gets a whiff of bad news, it can hammer the share price of a good company.
It all stinks, but I am here to tell you that the reasons you buy quality dividend stocks are the same reasons that will get you through these turbulent times.
The primary benefit of a dividend focused investing approach is to set yourself up to receive a steady and growing cash income stream. Always keep that in mind.
If you are a fairly new stock market investor, you need to understand that there will be market disruptions, which will make all of your research and plans look like you missed your mark. In reality, these corrections happen, and through decades of stock market action, share prices of quality companies always come back higher than before. And if you make a practice of investing in companies that consistently grow dividends, your income stream will grow and over time those larger payouts will pull up the shares prices.
While you do not want to sell anything when the market is down, the recent volatility in share prices is a good reminder to review your dividend stocks. Make sure that most if not all of your higher yielding stocks have the following characteristics:
- A business model that shows management’s clear path to future growth. This is the “buy the company, not the yield” advice.
- A history of steady dividend growth – the longer the better. Growing dividends indicate a management focus on investor returns. Avoid those companies that show great revenue and earnings growth, but that money never reaches the dividends as increases.
- Look for strong dividend coverage. For REITs the number is the percentage of FFO paid as dividends. Look for 80% or less. MLPs use a DCF coverage ratio, which at 1.1 or greater provides the necessary level of safety.
As far higher interest rates go, I think that fear is over blown. High quality bonds currently yield less than 3%.
The average yield for the stocks in The Dividend Hunter portfolio is over 7%, with a number of them over 8%, even one at 11%.
All of the stocks in the recommendations list have been increasing dividends and/or paying special dividends.
A sharp rise in interest rates would push bond yields up to maybe 4%, still well below what can be earned from a portfolio of quality, higher yielding stocks.
The falling price of crude oil will be a short term phenomenon. The Saudis are trying to push down the value to push OPEC competitors to reduce production. However, Saudi Arabia needs $100 oil over the longer term to support its economy and social programs to avoid domestic unrest. Also the U.S. fracking producers are very efficient as they will still be profitable at $70 oil should we go that low. I strongly believe that crude will be back in the $90s by early 2015.
In the meantime, buy more of the strongest MLPs on the cheap. Take a look at the recent subscribers-only report, “5 MLPs to Generate High Yield Income” for research on some of the current MLPs in The Dividend Hunter portfolio as well as a quick education on the basics of MLPs. Click here for your copy.
Also be sure to check out the November issue with one recommendation each in the REIT and BDC spaces. Click here for the November issue.