I read a lot of commentary from Wall Street analysts, particularly that which pertains to my current portfolio holdings. Sometimes I concur with their assessments and conclusions, other times I don’t.
But when it comes to dividend-paying stocks, I see eye-to-eye with Goldman Sachs right now.
That recommendation echoes the sentiments of Bank of America (NYSE: BAC), which just sent out a client note suggesting its asset allocation models favor equity income over bonds. Approximately 60% of S&P 500 stocks now offer a higher payout than the benchmark 10-year Treasury, whose yield has sunk to a multi-year low below 1.7% recently.
Relative to the last market peak in 2007, S&P stocks have just half as much balance sheet leverage and stronger earnings stability. Those are just two reasons why BAC makes the case that dividend stocks are the best bet in this low-rate environment.
Boutique wealth management firm Evercore is also steering clients toward dividend stocks, specifically singling out stocks like Occidental Petroleum (NYSE: OXY) and AbbVie (Nasdaq: ABBV), as potential outperformers.
If these well-respected research outfits are correct, then dividend-focused ETFs should be a prime beneficiary.
My New Favorite Dividend ETF
There are many good reasons the exchange-traded funds (ETFs) revolution took hold so fast. These funds, which have only been around for 25 years or so, have truly changed the investment world as we know it.
Thanks to the advent of ETFs, for a smaller-than-ever fee, investors can now easily venture abroad and invest a tiny (or a huge) amount of money in nearly any market they can think of. And ETFs have made it possible, for investors big and small, to create a variety of their own strategies too, to add new markets and domestic sectors to their core portfolios of stocks and bonds to better address their needs and goals.
ETFs provide ease of investing, diversification, quick access, and fast trading -- and this is the ultimate secret to their long-term success.
Of course, income investors should not feel left out. Rather, the opposite: So dramatic was the growth of exchange-traded funds over the past couple of decades that the current selection of dividend-oriented ETFs can sometimes overwhelm.
Worry not, though: one of my Daily Paycheck portfolio holdings is currently one of the best in the category.
Schwab U.S. Dividend Equity ETF (NYSE: SCHD) is an ultra-low-cost passively managed fund with a focus on both dividends and capital appreciation. It's based in the U.S. markets and is constructed from high-quality dividend-paying U.S. companies with a record of consistent dividend payments.
Some income investors might find the 2.9% yield too low for their liking. But consider this before you leap to a conclusion...
This unique exchange-traded fund was specifically built to track the performance of quality large-cap stocks with established dividend track records of at least ten years. From an initial universe of 2,500 stocks, candidates are scored in four areas: current yield, 5-year dividend growth, return on equity and cash flow/debt ratio.
Those that rank in the top 100 are eligible for membership in the index. That means the portfolio is skewed toward stocks whose payouts are not only elevated but also fast-growing and supported by solid cash flows.
While the ETF isn't going to be immune to volatility, the selection criteria for the fund makes it reasonably sure the companies in it are higher-quality ones, and this means they should be more resistant in a downturn (both in terms of price performance and the consistency of the dividends).
Second, SCHD is passively managed, so its cost is low (0.06% expense ratio). While this might be a secondary factor after the quality of its components, it isn't something to be ignored for an income-related holding.
Action to Take
Aside from dishing out an above-average yield, SCHD has turned in stellar total returns of 10.3% annually over the past five years. That performance ranks in the top 3%, beating 97% of all funds in the crowded large-cap value category.
For all of these reasons, my subscribers and I added the fund to our Daily Paycheck portfolio back in February. We're up nearly 11% since then, and I expect it to be a core holding of ours for many years to come.