Why Dividends are Really Important
Follow up on Last Year's Recommendations
My List of 10 Best Dividend-Paying Companies
I'm often asked if investing exclusively in dividend-paying
companies will bring the best results. There is no simple answer,
but history shows that dividend income is an important part of
your total return when you invest in common stocks. Rising stock
prices help to build your wealth and beat inflation, but
dividends provide a steady return on your investment through
thick and thin and add up faster than you think.
I'm also often asked by my readers for a list of stocks to
begin building their initial portfolios. Whether you're a new
investor or an old pro, you are young or old, I usually advise
that you include some ultra-conservative dividend-paying
companies in your portfolio. I call these stocks "core holdings."
Owning these conservative companies will not only allow you to
sleep at night, but will also provide you with modest
appreciation and dividend income for many years into the
Should you hang onto your core holdings forever? Some
companies can be held for a very long time, but I strongly
advocate reviewing your holdings at least once a year. Even the
largest companies can run into long-term problems.
Dividend-paying companies offer two ways to make money on
their stocks: The price of the stock can appreciate and the
dividend can provide income.
I recommend that you invest in companies with histories of
well-founded growth that will continue during the next several
years and even decades. A company's history of steady sales and
earnings growth will usually lead to relatively steady
appreciation and frequent dividend increases. In market declines
like we've been experiencing, dividend-paying companies tend to
decline noticeably less than stocks paying no dividends.
Dividends are the regular cash payments that a company sends
to you or to your brokerage account. You can, however, instruct
the company or your broker to reinvest your dividends into
additional shares or fractional shares. Reinvesting your
dividends makes sense, because the effects of compounding your
dividends will make your investment grow even faster.
Dividends are the payments of a company's hard-earned profits.
A company's ability to continually pay dividends provides
concrete evidence that the company is performing well. Accounting
malfeasance is harder, or impossible, if a large transfer of cash
is going to shareholders on a regular basis. I don't include
companies paying really low dividends; I am referring to
companies paying dividends yielding more than 1% per annum. This
figure is called the dividend yield and is calculated by dividing
the annual dividend by the current stock price.
When evaluating dividends and yields, beware of another common
pitfall: dividend coverage. You can evaluate dividend coverage by
dividing the annual dividends per share (latest quarter times
four) by the last four quarters of earnings per share (DPS
divided by EPS). The dividend coverage ratio indicates if
earnings can support the dividend. A growth company that pays a
small dividend will tend to have a lower dividend coverage ratio
than a well-established "blue chip" company that has a higher
As a general rule of thumb, most successful dividend investors
avoid companies with a dividend payout ratio above 50% or 60%.
Anything above that mark means the company may not be investing
enough capital back into the organization. Even though a
company's growth has slowed, it is still critical to reinvest a
portion of earnings back into the organization.
On September 22 of 2011, I wrote a Cabot Wealth Advisory
entitled "The Importance of Dividends." The article recommended
10 blue-chip companies, including Abbott Labs, Caterpillar,
Chevron and Disney, all of which paid above-average dividends.
How did these "stodgy" old companies perform?
My 10 blue-chip companies rose an average of 23.0% during the
past 13 months. In addition, every one of the 10 companies
increased their dividends during that interim-every one!
And what if these core stocks continue to appreciate 23.0%
every 13 months? Well, in five years. $100,000 will grow to
$282,000 with dividends re-invested, and in 10 years, $100,000
will grow to $795,000.
I couldn't possibly create a better example of why you should
include high-quality dividend-paying companies in your
Today, I have assembled a new list of 10 Dividend-Paying
Companies that I believe will perform very well during the next
year and beyond. These companies offer dividends averaging 2.0%,
which exceed the current 10-year U.S. Treasury bond yield of
1.6%. In addition to generous dividend payments, investors can
expect steady long-term earnings and dividend growth of more than
10% per year. All of the companies maintain strong balance sheets
with low debt and lots of cash. Annual dividend increases are
common for all of the companies and have averaged 21% annually
during the past five years.
The average dividend payout ratio for the 10 companies is 30%,
which is well below my 50% to 60% limit. And best of all,
high-quality companies have been neglected by investors during
the past several years and now sell at very reasonable
I believe you'll do very well by adding these companies to
your portfolio. I've included two of the companies here. If you'd
the full list of the
10 Best Dividend-Paying Companies
, receive it here
Accenture Plc (
, based in Ireland, offers management consulting, technology
solutions, and outsourcing services to clients in 48 countries.
The company helps customers to identify new business and
technology trends, formulate and implement solutions to boost
revenue, enter new markets, and deliver products and services
more efficiently. During difficult economic times, such as the
present, corporations seek help to cut costs, improve efficiency,
and improve operations.
Accenture is winning new contracts to facilitate
restructurings at client companies. In addition, ACN is helping
companies expand into rapidly-growing countries like Brazil,
China, and India as a means to offset their slow growth at home.
Accenture has a lot of competition, but the company continues to
take market share from its competitors. I expect revenues to
increase 9% and EPS to advance 10% during the next 12 months.
Accenture has a strong balance sheet with no debt and lots of
ACN currently trades at 15.5 times 12-month forward EPS
(earnings per share ending 8/31/13) of 4.24, with a dividend
yield of 2.5%. Results could exceed our expectations if the
company wins larger-sized contracts. ACN is very low risk.
CVS Caremark (
is the leading pharmacy and drug management services chain in the
U.S. During the past several years, the company has made several
major acquisitions that have enhanced CVS's growth beyond
expectations. The company's latest purchase of UAM Medicare
prescription drug plan business is producing better than expected
sales and earnings results. CVS will likely continue its
aggressive acquisition strategy in future years.
CVS's in-house Minute Clinics, which are staffed by nurse
practitioners and physician assistants, are a big hit. I expect
sales to advance 8% and EPS to climb 13% during the next 12
months. New drugs from drug makers and the wider use of generic
drugs will keep earnings growing rapidly well into the
CVS shares are undervalued at only 12.9 times my EPS forecast
of 3.61 for the 12 months ending 9/30/13. Additional acquisitions
could push sales and earnings higher than expected. The dividend
yield of 1.4% is modest, the balance sheet is strong, and my risk
rating for CVS is very low risk.
Until next time, be kind and friendly to everyone you
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