It's easy to forget about the importance of dividends when the market is notching new all-time highs. And while no old saw is a substitute for a comprehensive wealth management plan, there really is something to the cliche about high-quality dividend stocks never going out of style.
Dividends really do matter. Although such regular payouts to shareholders have become much less popular over the decades, dividends still account for a critical share of the market's total return (price change plus dividends).
Since 1960, 69% of the total return of the S&P 500 can be attributed to reinvested dividends and compounding, according to a study by Hartford Funds. And while companies may not pay dividends like they used to, dividends have still fueled nearly a quarter of the S&P 500's annualized total returns so far this decade.
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Interestingly, the case for dividends actually gets more compelling when the market is making new highs and valuations are getting stretched.
"Dividends have historically played a significant role in total return," the Hartford Funds report notes, "particularly when average annual equity returns were lower than 10% during a decade."
Sadly, average annual equity returns are indeed looking to be pretty poor over the next 10 years, at least by one highly regarded measure. The S&P 500 Shiller cyclically adjusted price/earnings ratio (CAPE) has a solid track record of forecasting long-term annualized returns. At its current level, Shiller CAPE gives the broader market an implied annualized total return of 3.9% over the next 10 years.
That's pretty crummy considering the S&P 500 delivered an annualized total return of more than 12% over the past decade. It also suggests that dividend stocks as an asset class could be very helpful to buy and hold these days.
Wall Street's top S&P 500 dividend stocks
In order to find Wall Street's top dividend stocks to buy now, we used S&P Global Market Intelligence to screen the S&P 500 index for analysts' highest rated names yielding at least 3% as of January 19.
A note on the ratings system: S&P Global Market Intelligence surveys analysts' stock recommendations and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. Any score of 2.5 or lower means that analysts, on average, rate the stock a Buy. The closer the score gets to 1.0, the stronger the Buy call. In other words, lower scores are better than higher scores.
We used a 3% yield as our lower bound because that's essentially twice the S&P 500's yield of 1.49%.
If you're looking to add Buy-rated dividend stocks to your portfolio, the names listed below are the best the S&P 500 has to offer, according to industry analysts.
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