Look for Rising Payouts in Utilities
There's a simple way to make sure your income stocks are performing up to snuff, and that's to make sure their payouts are either rock-solid or rising for the right reasons, notes Ari Charney of Personal Finance.
After an incredible run amid the market tumult of 2011, dividend-paying stocks were due for a breather in 2012. As such, our holdings gained 7% last year versus a 16% return for the S&P 500.
Aside from the global economic malaise, our stocks faced the additional headwind of Congress’ contentious negotiations to avert the so-called fiscal cliff. The deal that was finally struck at the outset of the New Year came too late as far as the market’s fourth-quarter performance was concerned.
Although our stocks suffered in sympathy with the broad market, they once again demonstrated their ability to preserve wealth when the market drops. That’s despite the fact that dividend stocks sold off as income investors fretted over a possible change in dividend taxes that largely failed to materialize. While the market lost 0.4% during the fourth quarter, our stocks gained 0.4%.
Over the long term, safe businesses coupled with growing dividend payouts result in a portfolio that beats the market while incurring less risk.
That gulf in performance may not sound like much, but thanks to the magic and power of compounding, it means a difference of almost 54 percentage points—for a total return of 146.5%. Almost as important, our portfolio achieved this outperformance with significantly less volatility than the market.