Dividends are an important part of a diversified portfolio. They provide value for investors even when the stock market is down, and they’re a reliable source of passive income plus stock price appreciation. Dividend stocks trend toward large, stable companies, and they offer security to protect your portfolio.
However, there may be other benefits. There’s evidence that dividend stocks may even outperform other stocks over time, like the proverbial slow-moving tortoise versus the growth stock hares. Consider famed investor Warren Buffett’s holding company, Berkshire Hathaway, which is loaded with dividend stocks and has outperformed the S&P 500 over many decades.
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The market is rising, up 26% this year, and it has reached above-average valuations. Is that a setup for a fall? Can it keep climbing? No one knows, and that’s why it’s essential to own dividend stocks. Ally Financial (NYSE: ALLY) and Realty Income (NYSE: O) are two top choices.
Ally is a small, or maybe medium, fish in the sea of American banks, but it’s making a name for itself as it promotes its differentiated platform. It’s differentiated in several important ways that bode well for its future and its ability to capture market share. It may yet break into the top echelon of U.S. banks.
The first way it’s different is that it’s all online, and it’s the top all-digital bank in the U.S. It has an impressive number of consumer account customers at 3.3 million, and it has added retail deposit customers for 62 consecutive quarters, including 57,000 in the third quarter.
Part of how it’s been able to reach this point is that it already has a leading position as the top prime auto lender in the country. It started out as the financial segment of General Motors, and it already had a century-old, fully developed auto loan business when it was spun off in 2009. Auto loans remain its core business, and it continues to see healthy demand despite the tough interest rate environment. It had $9.4 billion in originations in the third quarter.
Ally stock has been under pressure, and it plunged in September after it disclosed that defaults have been worse than expected. Its recent update was that auto loan defaults are high at 2.24%, but it’s taken strong risk-management action to bring that down. Ally stock jumped after the election along with most bank stocks, but it’s still super cheap, trading at a forward 1-year price-to-earnings ratio of only 8 and a price-to-book value of 0.9. At this price, its dividend yields 3.2%, making this an excellent time to add this high-potential Buffett stock to your portfolio.
