Dividend paying stocks have been overlooked for too long - it's
time to give them their due.
[caption id="attachment_55289" align="alignright" width="300"
caption="Even Apple has gotten the message about dividend paying
stocks."]
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During the dot-com boom of the late 1990s, tech companies like
Apple (
AAPL
,
quote
), Microsoft (
MSFT
,
quote
) and Intel (
INTC
,
quote
) did not pay dividends. Their boards of directors felt that their
billions in cash were better spent on research and acquisitions
than on rewarding shareholders.
Dividends are important to the total return of a stock though.
According to Vanguard mutual fund founder John Neff, the income
component of an equity provides more than 40% of the total
return.
Since 2000, dividends have been even more important.
The stock markets have been flat, and dividend paying stocks
have provided the only positive return.
At present, the average dividend on the Standard & Poor's
500 Index is around 2%. For an Asian stock, the average dividend
paying stock yields around 3%. The historical average payout ratio
-- the funds left over from earnings after paying a dividend -- for
a member of the S&P 500 has been around 50%.
The payout ratio says a great deal about the management of
dividend paying stocks. According to investment manager Jesper
Medigan, a dividend payout ratio of around 40% shows that company
management respects the rights of minority shareholders.
Medigan also says that
when Chinese companies have been found to be
fraudulent
, not a single one had paid a dividend. An income stream
is good proof of its overall health - a company can't fake a
dividend check.
Dividend paying stocks are particularly attractive when interest
rates are low. The
Wall Street Journal
says that investors have gotten
the lion's share of their returns from dividend yields
, not dividend growth or capital gains.
This is also true for the shareholders of Microsoft, Apple and
Intel. All three companies pay an above average dividend now.
Value manager John Buckingham (CIO, Al Frank Asset
Management) says dividend paying stocks are the best bet for a
tentative market.