Why buy dividend stocks?

There are two main arguments. Let’s start with ...

If you’re a long-term growth investor, the S&P 500 Dividend Aristocrats SP50DIV, -2.64% has an excellent record of outperforming the S&P 500 Index SPX, -2.37% . It doesn’t matter how high the yields are. This group of 52 S&P 500 companies has simply raised annual dividend payouts for at least 25 consecutive years.

The idea is that this type of consistent track record correlates to strong overall management and shareholder returns in the long haul.

The record of the Dividend Aristocrats against the S&P 500 over the past 10 years speaks for itself:

FactSet

For 15 years, the outperformance of the Dividend Aristocrats has been astounding:

FactSet

You can “play” the dividend aristocrats as part of a long-term growth strategy with the ProShares S&P 500 Dividend Aristocrats ETF NOBL, -2.03% . (Disclosure: I hold shares of NOBL.)

We discussed the Dividend Aristocrats in more detail last week, while also looking at the S&P High-Yield Dividend Aristocrats Index SPHYDA, -2.12% , which includes 100 companies among the S&P Composite 1500 Index that have raised their dividends for at least 20 straight years.

And the income case

The S&P High-Yield Dividend Aristocrats has a much less impressive growth track record than the S&P 500 Dividend Aristocrats Index, but it’s more aggressive. It includes higher-yielding stocks. And we discussed a way to pare the list.

Last week, Mark Hulbert took a different approach to publishing his 15 favorite dividend stocks. His focus was on quality and safety. The stocks listed have yields of up to 5.7%.

Any income investor is aware that with interest rates being so low for so long, market prices for bonds and dividend stocks are likely to fall as the Federal Reserve raises interest rates. But even after the Fed changes direction and begins raising the federal funds rate above the range of zero to 0.25%, where it has been locked since late 2008, rates are likely to remain quite low for a long time.

So the market prices of income-producing securities may not fall as much as many investors fear, or maybe they’ll stage a recovery after the hysteria of the Fed’s likely near-term policy change wears off.

“Based on our economic forecasts, we currently expect the committee to raise the funds rate by 100 basis points next year, or one hike per quarter — a fair amount above the 55-60 basis point pace priced into the bond market,” Goldman Sachs analyst Jan Hatzius said on Friday.

So it cannot be emphasized enough: If your objective is to maximize current income, you need to be able to commit to holding the securities for many years. Here’s a discussion about how being patient and sticking to your income strategy can pay off beautifully.

FBR’s high-income list

FBR & Co. Director of Research David Hilal and his team published a report on Monday listing “25 dividend stocks to own in a rising rate environment.” FBR is an investment bank based in Arlington, Va., that was founded in 1989 by Emanuel Friedman, Eric Billings and W. Russell Ramsey.

The idea was to comb the 250 dividend stocks FBR tracks to narrow the list to 25 “to own” in next year’s rising-rate environment. FBR further pruned the list to 10 “favorites.”

“We used both quantitative and qualitative measures, such as a minimum yield of 3%, a dividend that we believe is extremely safe and in many cases expect to go higher, and stable to improving fundamentals that provide not just a floor for the shares but also can drive share appreciation.”

So you may well see market prices for these stocks fall next year, but if FBR is correct, who cares? Your dividends will not decline, and they may even go up.

Again, these may be for you if income is your objective.

Here are FBR’s favorite dividend stocks for 2016, sorted by yield:

The highest-yielding stock on the list is New Residential Investment Corp. NRZ, -2.99% . The REIT’s most recent quarterly dividend was 46 cents a share, for a yield of 15.63%, based on Friday’s closing price of $11.77.

FBR analyst Jessica Levi-Ribner said on Friday that New Residential Investment is undervalued by the market and “should trade to a 9% yield given [its] growing book value, a seemingly clear view into core earnings and dividends, and relative rate insensitivity, all of which set it apart from peers trading closer to, or even under, book value and at comparable low- to-mid-teen dividend yields.”

The stock with the lowest yield on the list is James River Holdings Ltd. JRVR, -2.61% . The yield is only 2.06%, based on the most recent regular quarterly payout of 16 cents and Friday’s closing price of $31.09.

But FBR analyst Randy Binner said: James River Holdings “has significant excess capital, low operating leverage, and the ability to continue to pay out special dividends.”

FBR expects James River to pay out sufficient special dividends for an estimated yield of 8.7% during 2016.

If you’re sniffing around for income stocks and are interested in any of these names, the next step is to talk to your broker or adviser, get more information and start reading.