When it comes to dividend stocks, investors can fall into
the trap of focusing on dividend yield over all else. That can be a dangerous
strategy, as high-yield stocks almost always are higher-risk.
But the issue isn’t just the risk in high-yield stocks. It’s
the opportunity cost of ignoring lower current yields from companies with
better prospects to grow their profits – and their dividends.
After all, the best dividend stocks over time have been the
ones that have posted years, and often decades, of dividend increases. One
famous example is the investment by Warren Buffett’s Berkshire Hathaway
(NYSE:BRK.A,NYSE:BRK.B) into Coca-Cola (NYSE:KO). As Buffett pointed out in
last year’s shareholder letter, Berkshire now receives just more than 50% of
its original investment every year in Coke dividends.
But KO also shows a potential risk in dividend growth names:
as the boilerplate investment disclaimer goes, past performance is not a
guarantee of future results. General Electric (NYSE:GE) was a Dividend
Aristocrat until 2017, when it halved its dividend. GE stock has fallen 63%,
and its dividend was slashed again to just a penny per quarter.
Yield favorite AT&T (NYSE:T) last month held its
dividend flat for a fifth consecutive quarter after years of minimal growth.
Financials like Bank of America (NYSE:BAC) ended dividend growth streaks during
the financial crisis. A track record of dividend growth helps a bull case. It
doesn’t alone create a bull case.
These eight dividend stocks, however, have a solid history,
and a strong outlook to match. They should be on the list of every dividend
growth investor.
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