BALTIMORE (Stockpickr) -- The S&P 500 may be pushing up against new all-time highs this month, but whatever you do, don't forget about dividends.
When capital gains are running rampant, it's easy to forget about dividend payouts. While income stocks are a safety net for investors when markets turn sour, they're easily eschewed when the stock market is on track for double-digit percentage gains (as of yesterday's close, the S&P is on track for an 11.7% price bump in 2014). But that's a big mistake. Factoring dividend payouts in materially boosts your returns, even on a short year-to-date basis. Include dividends in the recipe, and suddenly the S&P is on pace for a 14% return this year.
2014 isn't an anomaly either. As I write, U.S. corporations are paying out record dividends thanks to a record pile of cash on corporate balance sheets. And, while few folks realize it, the dividend yield of the S&P 500 is hovering in a range higher than we've seen in any sustained period since the mid-1990s. Adjusting for the incredibly low yields on treasuries, dividend payouts are massive right now.
But to find the biggest gains, it's not enough to simply buy names with big payouts today. You've got to think about what they'll be paying tomorrow too.
So instead of chasing yield, we'll try to step in front of the next round of stock payout hikes.
For our purposes, that "crystal ball" is composed of a few factors: namely a solid balance sheet, low payout ratio and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or three, they do dramatically increase the odds that management will hike their cash payouts to shareholders.