Investors are taking a risk-on approach as Wall Street kicks off a strong start to the year. And despite rising crude prices and debt worries overseas, investors look to be turning away from last year’s popular safety plays and opting for higher-beta stocks.
Of course, the market’s still volatile, and although dividend-paying stocks are underperforming the S&P 500 index so far this year, analysts say there’s still room for high-quality stocks.
“Dividend-paying stocks are a defensive play and act as an anchor in an investor’s portfolio,” said Howard Silverblatt, senior index analyst at S&P Indices. “They’re a stable investment when the market is unpredictable.”
And while investors can play dividend-paying stocks numerous ways, exchange-traded funds are becoming a popular option.
The SPDR S&P Dividend (SDY), which holds 60 high-yielding stocks, is up 2.52% so far this year. SDY tracks the S&P High Yield Dividend Aristocrats Index that contains the top yielding stocks of the S&P 1500. Each holding has raised its dividend every year over the past 25 years.
And, according to Silverblatt, investors should keep a close eye on past dividend performance.
“Investors need to look at earnings and cash flow,” said Silverblatt. “I recommend starting with companies that have a record of increasing dividend payments over the last 8 to 10 years.”
A conservative play for investors is Vanguard High Dividend Yield Index (VYM). VYM’s top holdings dominate the fund, as high-quality, large-cap firms Exxon Mobil (XOM) and Microsoft (MSFT) account for nearly 10% of the fund’s portfolio weight.
Another exchange-traded fund offering investors exposure to high-dividend-paying stocks is WisdomTree LargeCap Dividend (DLN), which is up 4.57% in 2012 and up 7.3% over the past year.
But in a bull market, dividend-paying stocks don’t post the same gains as lower-quality, higher-risk stocks, and because of this Silverblatt says dividend-paying stocks should not be used to time the market.
“Dividend-paying stocks don’t offer great earnings in the short-term,” said Silverblatt. “Since movements are anchored, they’re a better long-term play.”