Investors looking to maximize total investment return in 2018 should plan on buying companies that not only pay significant current dividends but will increase the dividend amount paid out each successive year.
“If you want to clobber the market in 2018 — and beyond — then buying companies with accelerating dividends is an absolute must,” writes Brett Owens at Forbes.
“There’s never been a better time to buy them.”
Driving the rush toward dividend stocks is the recent GOP tax cut, which promises to return billions to corporate coffers.
According to Bloomberg News, in 2016 U.S. non-financial companies returned almost $1.3 trillion in the form of share repurchases and dividends.
These payouts to stockholders, as a percentage of gross domestic product, represent one of the largest payouts in history. This trend is expected to continue in 2018.
Companies have one of two ways to satisfy investors and use profits: Increase the dividend or buy back its own shares.
Buying back shares means remaining investors get a larger earnings per share number, a crucial financial benchmark that can positively affect share price .
Paying out dividends directly provides shareholders with an immediate benefit and is a tangible way of participating in the profitable operation of the business.
Companies that pay generous dividends have the added potential of increasing the payout year after year.
“Dividend growth is on a sugar high,” Owens writes. On January 6, research firm IHS Market predicted that global dividends would increase by 10% in 2018 — a record.
Investors shouldn’t buy stocks as a potential income stream based purely on percentage yield, which is dividends paid divided by the current price. That higher yield could be due solely to a recent drop in price.
If you focus exclusively on this measure it can backfire. For instance, the company’s share price could continue to plunge. The shareholder earns the same dividend, but that might come with the ultimate prospect of capital losses.
Instead, look for companies with a record of increasing dividends.
The best way to insure growth in dividends is to purchase companies that have a payout ratio of 50% or less, which is dividends paid divided by the last 12 months of earnings.
Another is to rely on lists of dividend payers, such as the Dividend Aristocrats. These companies have raised their dividends for at least 25 consecutive years and in some cases for 50 years or more.