Dividend investors looking for solid total returns in 2015 should turn to beaten-down energy stocks. With bonds yielding practically nothing and most other traditional sectors for dividend investing looking pricey, high-yielding energy stocks are your best income bet in the new year.
Never discount the importance of dividend investing to your total returns. After two solid years of market returns in 2013 and 2014, it's easy to take dividends for granted. But in years where the market is flattish or down, the dividend may be the only return you see at all.
After six years of nearly uninterrupted bull market conditions, u.s. stocks are priced to deliver some pretty uninspiring returns going forward. At the risk of sounded alarmist, the Shiller P/E (i.e. the 10-year cyclically-adjusted P/E ratio, or “CAPE”) is currently at the levels we saw before the 1929 crash and the 2008 meltdown.
Now, I'm not a doom-and-gloomer, and I'm not forecasting an imminent crash. But realistically, we're looking at pretty measly returns going forward. Assuming a reversion to the long-term average, we're looking at future returns of about 0.1% per year going forward. At these levels, dividend investing may be more important now than at any time in the past 30 years.
As we enter a new year, it's time to evaluate dividend investing sector options. 2014 was definitely the year of the REIT, as I suggested it would be this time last year. At the end of last year, I noted that conservative equity REITs were on sale, offering fantastic yields in what I expected to be a continued low-rate environment. The mid-2013 “taper tantrum” had thoroughly thrashed the REIT sector, leaving some fantastic bargains.
Well, REITs are no longer the bargain they once were. As a sector, they are poised to finish 2014 up almost 30%. Meanwhile, many solid energy stocks are down 20% or more from their recent highs. If you believe that energy stock dividends are safe—and let me emphasize that I do—then energy stocks are the dividend investing pick for 2015. Here are some of my favorites.
