June 11, 2013
I hope last week's blog post didn't turn you away from dividend stocks entirely. Since that day, my inbox has been jam packed with questions about what's my outlook for high-yield stocks, so I wanted to take a moment to clarify just how the rules of dividend investing are changing. Well, I should say that the rules of dividend investing are reverting…specially back to what we saw nearly two decades ago.
The market this year is tracking 1995. If you compare this year's market activity with historical data from 1995, it's eerie how similar they are. For 2013 so far, the Dow is up 15.7% and the S&P 500 is up 14.4%.
Back in 1995, the Dow was up 15.4% by early June and the S&P 500 was up 15.8%.
What happened in 1995 is that dividend yields started to creep up, so a lot of investors started to flood into the stock market. Much of that year's rally was caused by nervous investors, specifically those with fixed incomes. And we've seen much of the same thing this year. According to The Wall Street Journal, more than 350 bond funds bought stocks late last year!
However, thanks to growing nervousness about when the Fed will halt the money pump, bond yields are on the rise, and that's taken a bite out of some high-yield stocks. But I want to be clear that dividend stocks in the long run aren't going anywhere. As long as you follow the criteria that I covered in my recent blog post for dividend stocks, you should be fine. Even so, you should still do your homework. If in running one of your dividend stocks through Portfolio Grader, you notice that it's D- or even F-rated, then you may want to consider letting it go. In most cases, a poor rating in Portfolio Grader is a telltale sign that a stock has become too hot to handle.
In closing, I'd like to mention that 1995 was a tremendous year for Wall Street. After a brief pullback during July and August, both the Dow and S&P 500 went gangbusters in the fall and finished the year up 33%! My hunch is that 2013 will continue to mirror 1995 in terms of performance. However, it never hurts to be careful, so please continue using Portfolio Grader to screen your stocks.