When the stock market is surging, investors don’t seem to care much about dividends. That was certainly the case in 2013. After all, with the S&P 500 soaring nearly 30% last year, a 2% dividend yield seemed pretty measly.
But with increased volatility here in 2014 and a flat overall market, income has become more important for investors. This is one of the reasons why the stodgy, high-yielding utility sector is the best performer year-to-date.
Historically, companies have paid out a little over half of their earnings in the form of dividends, while the stock market has averaged a dividend yield of 4.4%. However, just 32% of earnings are paid out in the form of dividends today, and the market yields a little more than 2%.
It’s no wonder why investors typically focus on price gains much more than income these days. But over the long run, dividends have actually contributed more than 40% of total stock market returns.
And after a 5-year bull market in which the S&P 500 has surged over +175% and valuations have become a bit stretched, don’t be surprised to see dividends contribute a significant portion of total returns over the next several years.
Growth and Income at a Reasonable Price
With the increased focus on total return, investors should consider adding some growth and income stocks to their portfolio.
To find some top-performing growth and income stocks, I ran a screen in Research Wizard where I looked for stocks with the following criteria:
- Dividend yield > 2%
- Zacks Rank of 3 or better
- Forward P/E below 18
- Solid earnings growth projections
- Growing dividend
- Strong performance year-to-date vs. the S&P 500
Here are the top 4 names from the list: