Why Investors Are Flocking Back To Dividend Stocks [Johnson & Johnson, Altria Group Inc, Walgreen Company]

dividendsChris Preston: Stocks have been on a furious run the last few weeks. And dividend stocks have led the charge. Here’s why that trend should continue.

A month ago, investors were abandoning stocks as if they were jumping out of a rowboat before a tidal wave hits. Now stocks are back at all-time highs.

dividendstocks

The rush back to stocks was fast and furious. The rush back to dividend stocks was even faster.

The S&P 500 has risen 9.4% since hitting bottom on Oct. 16. Dividend stocks, as measured by the SPDR S&P Dividend ETF (NYSEARCA:SDY), have risen a full 10% during that time. Admittedly, that’s not a major difference. But it shows the appetite investors still have for dividend stocks even after the Fed’s latest comments about raising interest rates.

The Federal Open Market Committee recently hinted at finally raising short-term interest rates from near zero, perhaps as early as next summer. As I wrote last week, it’s dangerous to read too much into what the Fed says or means in its phrasing of certain words. Even if the Fed does raise the federal funds rate as early as next summer, that’s no reason to get rid of your dividend stocks just yet. It’s only November.

Fortunately, most investors don’t seem to be in much of a rush to dump their dividend stocks. Just the opposite, in fact. Some of the most prominent dividend payers have been on fire in recent weeks.

Take a look at how some of these large-cap dividend stocks have performed since the tide turned on Oct. 16:

  • Johnson & Johnson (NYSE:JNJ): +12.3%
  • Target (NYSE:TGT): +9.7%
  • Altria (NYSE:MO): +10.5%
  • Walgreen (NYSE:WAG): +12.6%
  • McCormick & Co. (NYSE:MKC): +9.8%
  • Lowe’s Companies (NYSE:LOW): +12.6%

And those gains don’t include the high yield that accompanies long-term dividend growers.

My point is this: We don’t really know when the Fed will raise interest rates. It could be six months from now. It could be a year from now. Regardless, when it happens, short-term interest rates won’t automatically jump back to the 5% level they sustained for most of 2006-2007. The federal funds rate hasn’t been higher than 0.2% since 2008. It will take time for rates to get back up to respectable levels.

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