How to Uncover Rich Dividends in a Yield-Starved Stock Market

By Mike Burnick

Editor’s Note: The TradeSmith offices will be closed for an extended year-end period beginning Tuesday, Dec. 24, and our regular hours will resume on Thursday, Jan. 2, 2025. Our Customer Service team will be unavailable by phone during this period, but can be reached by email only on Dec. 26, 27, 30, and 31.  Please note that we will NOT have our Tuesday Inside TradeSmith article, but we will be back as scheduled on Dec. 26. Happy Holidays!

The S&P 500 Index notched plenty of new highs this year – with 56 daily record closing highs as of Dec. 4, to be exact.

But that climb to new peaks has also inflated the stock market’s valuation, leading to another milestone for the S&P… of the wrong kind, at least for dividend enthusiasts.

The S&P 500 dividend yield sunk to a measly 1.18% this year – the lowest yield in two decades. You would have to go back to 2001 to find a yield this low for the blue-chip index!

Chalk it up to the dominance of the “Magnificent 7” and other mega-cap stocks, many of which pay little to no dividend at all. And with most investors today chasing sectors like AI, quantum-computing stocks, or even cryptocurrencies, it’s no wonder that boring, old dividend stocks have gone out of style.

But sometimes, boring truly is beautiful – especially for dividend-paying stocks when market volatility begins to rise, as it has in the past week. Yesterday alone, the Dow Jones Industrial Average (DJIA) dropped 1,100 points – while the high-flying Nasdaq 100 plunged more than 3%.

It seems the Federal Reserve has signaled fewer rate cuts, compared to the stock market’s expectation.

Perhaps the one-day stock swoon – thanks to the latest Fed folly – will be quickly forgotten. Or, maybe it’s the start of a long overdue pullback.

Either way, now’s the perfect time to reconsider boring, old dividend stocks for part of your portfolio…

Two Reasons to Pursue Dividend Stocks

1. Dividends Grow

    Dividend payouts from high-quality companies tend to increase over time. That means your “yield on cost” – the return based on your original purchase price – can skyrocket in just a few years.

    Even with yields under 2% today, holding dividend-paying stocks long term could easily beat today’s 4% money market interest rates:

    2. Buy Low

      Dividend payouts have historically made up about 40% of the market’s total return since the 1930s.

      And stocks that consistently pay and grow their dividend payouts outperform the S&P 500 by a factor of 3-to-1, as shown above. Even better, they beat non-dividend-paying stocks by 18-to-1!

      And if you’re worried about inflation going up again, there’s more good news.

      During the high-inflation 1970s, dividends accounted for more than 70% of stock market returns. This is tangible proof that dividend-paying stocks havebona fide inflation-resistant credentials.

      This is true because dividend payouts often rise in conjunction with inflation. And quality companies that can boost their dividends during high-inflation stretches have “pricing power” that can outperform during inflationary times.

      What’s more, high-quality, dividend-paying stocks are also somewhat recession-resistant. During the 1930s – and again during the 2000s – dividends almost completely offset the decline in stock prices.

      Dividends are a tried-and-true way to both grow and preserve your wealth – but don’t make the mistake of reaching too far for high yields.

      An unusually high dividend yield may look enticing, but it can also be a red flag. A “too-good-to-be true” payout could indicate that the dividend is unsustainable – perhaps even a sign that the company is in financial distress.

      If either is true, you could be looking at a dividend that’s about to be cut – or even eliminated completely. And, as shown in that chart above, companies that cut or eliminate their dividends are the worst performers stocks.

      On the other hand, the historical data clearly shows that stocks with attractive – but not too high – yields consistently beat the stock market. And they do so with much less volatility, so you can sleep easier at night.

      In fact, these stocks typically outperform those with the highest dividend yields over time. Analysis shows that the “sweet spot” for dividend yield isn’t the top 20% of stocks by yield. Instead, it’s stocks in the second-highest 20% by dividend yield that perform best.

      TradeSmith Tip

      Here’s how to find stocks at the sweet spot of attractive dividend yield and high quality on your own – using a simple TradeSmith Screener.

      First, I want to focus on stocks that qualify for our proven Dividend Growers strategy – these are already healthy, green zone stocks with consistent dividend growth.

      To cast a wider net, I include the entire S&P 1500 (large-, mid-, and small-caps) by adding the Markets filter and choosing these indexes.

      Second, I’m looking for the sweet spot (the second 20%) of dividend yield. Today, that’s roughly 2.4% to 3.4%- about double the S&P 500 yield.

      So, I add the Trailing Dividend Yield filter and set it for those values.

      Third, I also add a filter for our TradeSmith Business Quality Score (BQS), excluding any stocks that don’t fall within the top half (50%) by quality. Higher quality means more sustainable dividend payouts and growth.

      Here’s a screenshot below:

      This screener can serve as your “road map” to finding that sweet spot where dividend yield meets quality. Be sure to save it and make it your own with additional filters you may want to include.

      The screen above gave me 19 quality dividend-paying stocks with yields that are in the sweet spot. Here are the Top 10 – sorted by dividend yield:

      Mike Burnick’s Bottom Line: Quality, dividend-paying stocks never go out of style. The intersection of dividend yield and quality is where you can beat the market – with less volatility and all while owning stocks with growing dividend payouts over time. And the best part? You’ll sleep better even during volatile markets.

      Good investing, and happy holidays!

      Mike Burnick
      Senior Analyst, TradeSmith

      P.S. As we approach 2025, a major opportunity in the AI sector is emerging – with a potential comparable to the internet boom. And while quality, dividend paying stocks offer stability, let’s not forget about the undeniable excitement around AI. 

      In fact, over at our corporate partner, InvestorPlace, my colleague Luke Lango has been tracking the two waves of the AI Revolution – the AI Builders and Appliers. And his early recommendations in AI Applier stocks like Axon (AXON) and AppLovin (APP), which are up 350%, have already more than paid off!

      Luke, along with colleagues Eric Fry and Louis Navellier, recently revealed a new portfolio of top AI Applier stocks, and they’ve shared their insights in a special broadcast.

      As we look toward 2025, another pivotal event looms: “AI Day One.” This milestone marks a critical moment on the horizon, creating opportunities for explosive growth in these highly selective stocks. And a special, free broadcast explains how to pick up on this “new wave” of AI stocks. Learn how to position yourself now, before the next big wave hits.