By Philip van Doorn, MarketWatch
Easy-money policies of global central banks have made dividend stocks more important than ever for investors who need income.
The U.S. Federal Reserve, European Central Bank, Swiss National Bank and other central banks around the world are in loosening mode, which is pushing down interest rates and inadvertently hurting income investors. On the other hand, U.S. stock prices are near record highs.
So a prudent strategy for dividend investors might be to scour the U.S. for underperforming shares of companies that generate enough cash to cover payouts.
Investors are convinced the Federal Open Market Committee will start a new round of interest-rate cuts as early as July 31. There has been plenty of discussion in the financial media about the Fed needing to “compete” with other central banks, whose policies have led to $13 trillion in bonds with negative yields. As absurd as that might seem, especially when developed economies aren’t in recession, this type of craven monetary policy has gone mainstream. (Here’s an IMF working paper touting the use of negative interest rates to spur economic growth during recessions .)
OK, fine. But how will that work when rates in so much of the developed world are already negative?
In his daily Out of the Box commentary, Mark Grant, B. Riley’s chief global strategist for fixed income, wrote on July 22 that the negative yields exist “for one reason only, and it is because the nations of the European Union, Switzerland and Japan have mandated that their central banks take rates to these levels so that their countries can survive.”
Grant elaborated in a later commentary: “Most nations in Europe cannot afford their budgets, or their social programs, and have lost their ability to raise taxes without having their politicians thrown into the streets, and so they manufactured money in their computer rooms and lowered the yield on their bonds, to less than zero, in many cases.”
All this, with low inflation. If you are planning to retire 10 years from now and fund a significant portion of your expenses with interest or dividend income from savings or investments, you may have to change your plans. Unless inflation quickens and forces a complete change in central banks’ policies, interest rates and dividend yields may be too low for a simple change “from growth to income” to fund your golden years.
This is why in March we listed stocks of companies with very long track records for dividend increase that had recently increased their payouts significantly.
Another piece features two money managers’ approaches to building portfolios of stocks with rising dividends.
How to get higher dividend income now
The Federal Open Market Committee’s last policy statement June 19 fed the current rate-cut frenzy. There was a clear change in the market that has helped push the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.90% and Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.58% to new highs, while prices for bonds and preferred stocks soared.
Here are large lists of dividend stocks that have the highest yields, with payouts comfortably supported by free cash flow published during the June 18-19 FOMC meeting.