as part of our
BRIC countries. Social media IPOs. And now dividend stocks?
Two weeks ago, at the 15th Annual
Conference, I was asked if dividend stocks were the next investment
craze destined to fade.
My response? Not a chance!
Admittedly, investor interest in dividend stocks keeps perking
up. But that's a by-product of artificially depressed interest
the sign of an investment bubble.
I mean, we'd be terrible stewards of our hard-earned capital if
we just rolled over and accepted the going rates on certificates of
deposit or U.S. Treasury bonds.
So it's only natural for investors to be on an aggressive hunt
for yield when the average money market pays next to nothing.
It's true, too, that companies paid out a record amount in
dividends last year. A total of $281.5 billion for S&P 500
companies, to be exact. And it's impossible for companies to keep
paying out record amounts every year for eternity.
But trust me. We're nowhere near the end of the dividend
bonanza. Here's why…
~Reason #1: Payout Ratios Remain Low
As I've noted before
, the percentage of profits that companies are paying out in
dividends remains low.
The payout ratio for the S&P 500 Index currently checks in
at 36%. While that's up from 29% about two years ago, it's still a
country mile away from the long-term average of 50%, according to
Standard & Poor's head number cruncher, Howard Silverblatt.
In other words, companies can easily afford to keep paying
dividends. Much higher ones, in fact.
And that's exactly what's happening. So far this year, 116
companies in the S&P 500 already increased their dividends.
~Reason #2: Cash Balances Remain High
In addition to an abundance of profits to pay for dividends,
there's a record amount of cash sitting on corporate balance
sheets, too. Over $1 trillion, based on the most recent tally.
) serves as a classic example of what happens when companies sit on
cash too long. Shareholders revolt! And they demand that the cash
is paid out.
I'm willing to go out on a limb here and say that most companies
don't want to endure the public relations nightmare and distraction
caused by such occurrences. So they're more likely to pony up
before any shareholders grumble.
Add it all up, and we could be in store for another flood of
special dividend payments, as well.
~Reason #3: Corporate Insiders Like Getting Paid,
The No. 1 reason we're not going to see a dip in dividend
payments relates directly to greed. Or, if you prefer more
politically correct terminology, it's because humans are
self-serving. All of us.
) Adam Parker notes, the structure of corporate compensation
packages hit a key milestone right before the financial crisis.
Specifically, more CEOs now get paid with restricted stock grants
than with options.
As Parker explains, "It is important that fundamental analysts
understand how the senior management teams of the companies they
are analyzing are variably compensated, as those with restricted
stock and not options are much more likely to increase dividends.
The principle? People rarely intentionally damage their own net
Bottom line: Unless you believe corporate insiders aren't
interested in enriching themselves, the dividend bonanza is going
to continue. And sharing in the dividend payments is easy, too. All
you have to do is stick to my "Seven-Step System to Finding the
Safest High-Yield Stocks in Any Market."
Or, if you simply want someone to tell you what dividend stocks
to focus on, then all you have to do is sign up for our
Dividends & Income Daily