Stocks continued to tank this week, with the S&P 500 breaching support at 1,868 after Wednesday’s mini-market collapse. The index is now down more than 9% since the calendar flipped to 2016. It seems there’s no safe place for investors to hide other than cash.
Mercifully, that’s not entirely true. A small, resilient group of dividend stocks have managed to weather this January storm. Fortunately, we own three of those stocks in my Cabot Dividend Investor investment advisory.
As of this writing, only 18 of the 500 stocks that comprise the S&P 500 are up in 2016. (And not one of the 30 Dow stocks!) Sixteen of the 18 pay a dividend. That’s not exactly ironclad evidence that dividend stocks are your only chance at a return right now. But 16 out of 18 is pretty telling.
It’s not really a mystery as to why dividend stocks would be more attractive to investors in a cratering market like this one. The yields offer a nice cushion to soften the blow of a declining share price, and obviously the higher the yield the bigger the cushion. So it’s also no surprise that the 16 dividend stocks in the black thus far this year boast some pretty strong yields, with an average yield of 2.7%.
The three stocks that are part of the Cabot Dividend Investor (CDI) portfolio boast varying yields—but excellent total returns.
CDI Dividend Stock #1: Baxalta (BXLT)
The first is a stock we actually sold just last week, at a total return of 26% in just over five-and-a-half months. The company is Baxalta, a pharmaceutical company recently acquired by Irish rare-disease drugmaker Shire PLC (SHPG) for $32 billion, or $18 in cash plus 0.1482 of its American depositary shares for each Baxalta share. That resulted in an instant payday for BXLT holders, which is why I recommended cashing out.
With a mere 0.7% yield, BXLT wasn’t a great fit for our portfolio anyway. But you can’t argue with that kind of share price appreciation in only five-and-a-half months—nor the trend-bucking 3.7% year-to-date return.
CDI Dividend Stock #2: Consolidated Edison (ED)
Consolidated Edison is a better buy-and-hold play than BXLT.
Part of our portfolio’s “Safe Income Tier,” ED is a Dividend Aristocrat, having upped its dividend payout every year for the past 41 years. It also offers a very strong 3.8% yield, which has contributed to the 34% total return since we bought the stock in February 2014 (vs. a 6.7% return in the S&P 500 during that time).
Year-to-date, ED’s share price is up 4.9%, which is why we currently give it a “Buy” rating. One of the largest investor-owned energy companies in the U.S., Consolidated Edison provides electricity and natural gas to New York City and most of Westchester County.
Utility companies are historically synonymous with safety, so it’s no surprise that a large utility company that has raised its dividend for four decades has become a popular storm shelter amid the current market storm.
CDI Dividend Stock #3: Xcel Energy (XEL)
Another member of CDI’s “Safe Income Tier,” Xcel Energy yields a robust 3.4% and its share price is up slightly (0.8%) in 2016. Like Consolidated Edison, Xcel Energy—which provides electricity to 3.3 million customers and natural gas to 1.8 million customers in eight states—is benefiting from its position as a safe utility play.
But XEL’s success hasn’t been limited to the past three turbulent weeks: the stock has a total return of 27%, with a 4.2% yield on cost, since we recommended it to CDI subscribers in October 2014.
The Bottom Line
So what’s the overriding purpose of this column, other than to convince a few of you to sign up for the Cabot Dividend Investor service? (If you are interested, please click here!)
It’s that now is the time to be loading up on dividend stocks—and the safer the better. Dividend Aristocrats—stocks that have raised their dividends for at least 25 years running—are a great place to start. High yields are nice too, though you want to avoid stocks whose dividend payouts fluctuate from year to year and quarter to quarter. Safety is the greater premium in a market like this one.
Until the market stabilizes—and that could take months—safe dividend payers will be the first place investors are willing to put their money. At some point this year, there will more than 18 large-cap companies that are in the black. But for the foreseeable future, you can bet a vast majority of the top performers will be dividend stocks.
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