Dividend stocks are dirt cheap. It may be time to back up the truck.

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Dividend stocks’ yields are the highest, relative to the S&P 500, that a veteran fund manager has ever seen.

The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.

Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF DIVL, use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.

The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year.

The opportunity — high relative yields The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index RUT, which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.

Examples of high-quality stocks with high relative dividend yields After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.

Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

 

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