Dividend-paying stocks: more gains ahead

Dividend-paying stocks have room to grow, says BlackRock's CIO. One reason: Investors dissatisfied with low returns on their savings will be lured by the higher payouts of dividend-paying stocks.

Dividend investing has momentum and room to grow — possibly even faster than earnings this year — despite low payout ratios as companies hoard cash, Chris Leavy, BlackRock CIO, told CNBC Thursday.

 Leavy, who advises on BlackRock’s $275 billion in actively managed equities, attributes his optimism to three things: inflows of only $22 billion last year, compared with more than $100 billion for the past three years for bonds; companies making 12 to 14 times earnings and paying out reasonable dividends; and the growing number of investors dissatisfied with the low interest rate on their savings.

Leavy said a reasonable dividend means you don’t necessarily have to reach for the highest yields possible. “You want an above-average dividend yield, but you really want to focus on dividend growth,” Leavy said. “Most people are going to have a very long retirement. [With] a fixed coupon … that purchasing power isn’t going to grow.”

 He also advises investors to avoid companies with over-leveraged balance sheets. Leavy’s top picks include global consumer companies like Coca-Cola. Investors “can ride the growth of the middle class in some of the emerging economies,” he said.

And despite recent cuts, the firm believes dividend payout ratios in the financial sector will go on the rise, as is the case with JPMorgan Chase.

“The best protection against dividend cutters is to really focus on the long-term growth of the dividends,” Leavy said. “That way you have some margin of safety.”

He noted that the ideal portfolio would include a combination of high-yield, lower-quality bonds and high-quality stocks, whose long-term growth rates are still “compelling.”