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:
Packaging Corporation of America (PKG - Snapshot Report)
Packaging Corporation of America manufactures linerboard and corrugating medium, as well as a wide variety of corrugated packaging products, including conventional shipping containers, multi-color boxes, and special design/application boxes used in the food and agriculture industry.
Earnings estimates have been soaring as the company has delivered four straight positive earnings surprises. It is a Zacks Rank #1 (Strong Buy) stock. The
company also pays a dividend that yields a solid 2.3%. Shares of PKG have returned a solid +8.9% year-to-date
Autoliv (ALV - Analyst Report)
Autoliv develops and manufactures automotive safety systems for essentially every major automotive manufacturers around the world. The company has been growing as demand for cars grows around the globe. The company also pays a dividend that yields 2.1%.
Earnings estimates have risen strongly for Autoliv following its Q4 earnings beat on January 31. It is a Zacks Rank #2 (Buy). Shares of ALV have returned +8.9% so far in 2014.
CubeSmart (CUBE - Snapshot Report)
CubeSmart is a real estate investment trust (REIT) focused on self storage facilities. As a REIT, CubeSmart must pay at least 90% of its earnings to shareholders in the form of dividends to avoid paying tax on that money. It currently pays a dividend that yields 2.9%.
Consensus earnings estimates have steadily risen for CubeSmart over the last few years as it has met or beaten the Zacks Consensus Estimate every quarter since 2009. It is currently a Zacks Rank #3 (Hold) stock. Shares of CUBE have returned +11.6% year-to-date.
General Growth Properties (GGP - Snapshot Report)
General Growth Properties is a REIT focused on regional malls. It is the second largest retail property REIT in the United States. GGP pays a dividend that yields 2.7%.
GGP has reported five consecutive positive earnings surprises, prompting analysts to revise their estimates significantly higher for the REIT over the last several months. It is a Zacks Rank #2 (Buy) stock. Shares of GGP have returned +11.1% so far in 2014.
The Bottom Line
With increased volatility and a flat overall market, investors are starting to focus on total returns more than just price gains. These 4 stocks each offer growth and income and have delivered strong returns to investors so far this year.
Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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