Buying and holding dividend stocks, over long periods of time, beats the market. Research proves it. First, dividend stocks as a group, outperform in bull and bear markets and beat the S&P 500, by 1.6% on average according to Ned Davis Research. But you can do even better (than a 1.6% beat) by focusing your stock selection only on dividend stocks that also have a low payout ratio. In a study by Credit Suisse, tracking investment returns from 1990-2008, the universe of high yielding, low payout dividend stocks, nearly doubled the returns of the S&P 500.
Today, the average dividend yield of S&P 500 stocks is 2.07%, and the average payout ratio is 51%. Not many stocks are better than average in both categories, which is why Wal-Mart (NYSE: WMT), J.M. Smucker (NYSE: SJM), and Kellogg (NYSE: K), look interesting. The three have have high dividend yields of 2.5%, 2.6%, and 3.3% respectively, and they have a track record of keeping their payout below 51% as well.
If you purchase one of the three aforementioned individual stocks, you should consider the potential down falls of each. While J.M. Smucker is performing relatively well, earnings grew 11% in Q1, it trades at a relatively high valuation. Its P/E is around 18, which is pretty high for a slow growth business.
Wal-Mart trades at a reasonable P/E multiple of 14, and Kellogg’s P/E is only 11, but both businesses are facing consumer headwinds. Kellogg is being challenged by consumers fading interest in cold cereals. To combat this, Kellogg is investing in its snack business. It purchased Pringles in 2012, and is currently bidding for British cookie and snack maker, United Biscuits.
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