Josh Peters: Hello! This is Josh Peters, Editor of Morningstar Dividend Investor. Dividend has a real wild ride not just over the last couple of months but really the last decade or more. Now, late 1990’s a lot of investors found dividends to be something you ignore, some investors even despites dividends. Then they became very popular to the point were some dividend paying stocks became over valued and other companies raised there dividends to levels that couldn’t be sustain the current down turn. And now dividends are probably associated more with fear you have done anything else. Now, we do is another dividend is going to be cutter eliminated, how can you tell if your dividends are different from those of Bank of America or city group or even Pfizer now this week. We have Morningstar think that this is actually a very good time to be looking at dividend as a source of total return from equities.
Not only are a lot of very high quality dividend paying stocks attractive on a price basis but because they’ve come down in price there dividend yields has move up into a very attractive territory specially when you consider how low interest rates are for treasuries money market funds in a like right now. I think there is three important things for dividend see care to remember in today’s environment. Point one is go out and look for high yields but not too high. Well I’m finding the best opportunities today are among stocks like McCormick and company was they used yield 2% but now yields three or in genuine parts and after mark that other parts distributor usually yields 3% today it yields 4 or 5%. Or utility like West Star Energy which used to yield four now yield six. These kind of yields may not seem all that exciting three, four, five, six percent yields until you start to consider that they’re much higher than the stock or ordinarily pay and these are not stocks who’s dividends we feel are at risks.
When you’re looking at the yield of say 12% or 15% or 20% that might sell on the lot juicier but chances are that those are dividends that are going to be cut. And when they’re cut you might also see the stock price decline even further. So you really what to stay in a sweet spot that will give you a very good income again relatively to very low interest rates without putting that income at risks. Now, the second point I’d like to keep in mind is that companies that are protected by economic modes what we look at is a company who set of sustainable competitive advantages for the long run are also going to be the best dividend payers over the long run. Now, in ordinary economic times when the economy is growing and it’s more normal to be thinking about the growth of the business having in economic mode, having competitive advantages suggest that the business will be able to take whatever earnings it doesn’t pay out in dividends. Investors that a high rate of return and in turn grow all the business and grow all the dividend. That’s very important, but now economic molds are even more important.
What I like is define companies that have narrow or wide economic modes. You know in some of the firms I mentioned just a minute ago would apply a system, a food distribution company as another one I like a lot that we believe has a wide economic mold and it’s very high returns on capital. We see this lasting along time because of the company’s strong, competitive position, it can maintain in pricing and it can maintain in favorable cost structure even when demand sags. Now you compare that to a now mold company and there is a lots of commodity oriented businesses like say Dow Chemical that are going to have a lot tougher time maintaining there dividends because they don’t have that pricing power. They can’t hold on to there economic profitability even in the down term.
And then point three is always by total return, never just buy yell. Dividend grow, seeking reliable consistent, good rates of dividend growth has been intricate to the Morningstar dividend investor strategy from day one. My attitude is that the flat dividend will maybe not so bad as dividend it gets cut is that rubbing you of you of your purchasing power overtime because it’s not keeping up with inflation. And for a dividend that is a yield of let’s say 3 or 4% and those in grow. You’re just not getting a very good income stream over the long term from the stock like that. And then one final over arching point, it’s important to stay diversified. If you’re going to rely on dividends for income that you’re in turn going to use to meet living expenses and other financial obligations. You don’t want to get all of your income from just one stock or just a small handful of stocks. Spread it out around maybe 15, 20, 25 different stocks. It will require more homework, you will have more work to do selecting which stocks you want to own but the treat to your over all income that would be post by anyone deteriorating situation is much, much less. And that’s set you for a much more reliable experience as an income investor overall. So, if that I’d like to thank you very much for watching, my name is Josh Peters, Editor of Morningstar Dividend Investor and if you are interested in learning more about dividend investor you can check out our information on morningstar.com.