Market conditions signal switch to dividend payers

Considering current market conditions, this might be a good time to consider switching some of your funds from supercharged growth stocks to boring dividend payers. In fact, that would be a good idea no matter what the overall market is doing. Why?

Without dividends, you only make money on a stock when you sell it to someone else at a higher price than you paid. By contrast, dividend stocks regularly pay you simply for holding them.

By following a conservative strategy, you could net 3% to 4% annually plus whatever share price gains your stocks rack up while you hold them. What are your money market funds currently paying?

But today I’m going to suggest a twist on that strategy that could substantially increase those returns. It involves limiting your portfolio to stocks likely to hike their dividends while you hold them.

You could win two ways when one of your holdings raises its payout. For starters, the dividend increase translates to a higher return on your initial investment. Plus, the dividend increase often drives the share price higher.

History

I first presented this strategy in a column published almost exactly two years ago. As of last Wednesday, the four stocks that I described back then had averaged a 37% return (dividends plus price appreciation), short of the S&P’s 45% number, but good for a conservative strategy. All four ended the period in the positive column and on average, increased dividends by 15% during that period.

Morningstar screen

Here’s how I used Morningstar’s Premium Stock Screener to come up with both lists.

Candidate universe

I started by using MStar’s “Dividend Yield” search parameter to specify at least 3% annual dividend yields. I also specified “Domestic” stocks only because the U.S. is the strongest global market.

MStar does the math

Then rather than donning green eyeshades, I let Morningstar do the heavy lifting by limiting my list to stocks rated four or five stars. Morningstar’s ratings, which compare a stock’s share price to its estimated fair value, run from one star to five stars, where higher is better.

History repeats?

In my experience, stocks with strong dividend hike track records are you best bets to repeat that process. I used MStar’s “Dividend Growth %” parameters to limit my list to stocks that have already raised their payouts by at least 7% in each of the past two years.

Following the same logic, I used Morningstar’s “12-Month Return” parameter to limit my list to stocks that have produced positive total return numbers over the past year. I didn’t check longer periods because pandemic-related issues probably distorted those numbers.

Four candidates

Here are the four stocks that my screen turned up.

• Citizens Financial Group (ticker: CFG): Operates around 1,600 retail banks in the New England, Mid-Atlantic and Midwest regions. Dividend yield is 3.3%.

• First Horizon Corp. (FHN): Operates in 12 southern U.S. states. Pays 3.7% dividend yield.

• Gilead Sciences (GILD): A diversified pharmaceutical maker, Gilead operates in more than 35 countries worldwide. Pays 4.1% yield.

• Trinity Industries (TRN): Offers a variety of rail transportation products and services as well as highway traffic control and logistical services. Pays 3.2% yield.

As always, consider the stocks turned up by any screen to be research candidates, not a buy list.

Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.