+highest dividend stocks and how to select dividend stocks.
Hope you are all doing financially better than last week! In this week’s edition of the Gist, we’ll find out whether bonds are in a bubble, how to look for dividend stocks, and what stocks have the highest dividend yield!
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So here are your questions for today’s edition:
Is the bond market in a bubble now?
How should I invest in dividend stocks? What should I look for when investing in dividend stocks?
What stocks pay the highest dividends? Should I buy those stocks?
Let’s give you the summary first.
The bond market is potentially in a bubble. The prices are high, and there is a convincing narrative explaining away the price (‘this time it’s different’); however there is no indication that people are taking debt to invest in bonds. See below the characteristics of financial bubbles.
First of all, decide whether to invest in dividend funds or stocks. If you don’t know much about individual stocks, you may be better off with dividend mutual funds and ETFs. But if you decide to invest in single companies, look for those that are likely to be in existence many years down the road, and that also offer high yields. Also, diversify your holdings. More details here.
Based on AskFinny dividend screener, the stocks with the highest forward dividend yield are New Media Investment Group, ticker NEWM (17.84%) and Sprague Resources, ticker SRLP (16.55%). We don’t recommend you buy those stocks before doing further research.
The bond market is potentially in a bubble. There are 4 criteria that need to be met to consider a market a bubble:
cheap money creates the bubble;
debt is taken on during the bubble build-up, which helps fuel speculative price increases;
the asset price has an expensive valuation;
there’s always a convincing narrative to ‘explain away’ the high price.
Bonds satisfy criteria 1, 3 and 4 above, but we don't have any evidence that people are buying bonds on margin (the second criterion).
The current narrative is that western economies are stuck, and central banks will have no choice but to keep cutting rates and printing money (so called the Japanification of the world).
Dividend yield is important, but not the only important factor for dividend stock investing.
Our suggestion is, if you’re interested in dividend stock investing, choose healthy companies that can sustain their dividends for years. Look for companies that are not being disrupted, with payout ratios (the proportion of earnings paid out as dividends to shareholders) well below 80%.
If finding individual stocks is too complicated for you, try investing in dividend ETFs (ask Finny for "dividend ETF", “Vanguard dividend”, “Schwab dividend” and “Fidelity dividend” and view popular choices in the drop-down menu).
Based on Dividend.com, the payout ratio of those two stocks is higher than 60%, which could be concerning to some investors. Here are the specifics:
NEWM payout ratio is 211%
SRLP payout ratio is 75%
So please do further research before investing in those stocks.
That’s it for this edition. What would you like to hear about in our next Gist? Ask us a question here.
The AskFinny Team