by Chuck Carlson, editor DRIP Investor
Low interest rates remain a positive for dividend stocks in 2013. As it
becomes more difficult to generate meaningful returns from fixed-income
investments, you are likely to see a transition from bonds to stocks in
2013.
In fact, I believe this transition is already taking place
and will accelerate if the stock market can maintain its upward pace
that we have seen so far this year.
Clarity on the tax situation is also a plus. Admittedly, I'm not a fan
of seeing anyone's tax rates on dividends increasing. Nevertheless,
given where dividend rates were headed without the fiscal-cliff
compromise, the situation could have been much worse.
With much
of the tax uncertainty on dividends removed, and many investors left
unaffected by the tax changes, I expect there to be renewed interest in
dividend stocks.
In addition,
there's plenty of room for more dividend increases. By historical
standards, the percentage of corporate profits that are being paid out
to shareholders in the form of dividends is still on the low side.
Corporate
America is paying out just slightly more than one-third of profits in
dividends, down from the historical average of 52%. Thus, companies have
plenty of flexibility to boost dividends if they so choose.
If
you are looking to add quality dividend payers to your portfolio,
consider stocks that S&P has coined "dividend aristocrats." These
are stocks that have raised dividends annually for at least 20 years.
Some of my favorites among these dividend aristocrats are Aflac (AFL), the insurance firm; American States Water (AWR), a water utility in California; and Exxon Mobil (XOM), the oil giant.
Others that merit attention from long-term investors are PepsiCo (PEP) and Procter & Gamble (PG). Both offer solid yields and ample dividend growth, and I expect both to perform better in 2013 as earnings recover.
Another
common thread among these picks is that they all allow any investor to
buy the first share and every share of stock directly from the company.