Let's get the bad news out of the way. Dividend-paying stocks
have risen just 2.3% in value on average since 2001, according to
Wells Fargo. But if you add in the value of the dividend payments,
then you're looking at a healthier 26% return. That's about 6%
higher than the broader S&P 500 during that period.
Perhaps even more impressive is the fact that dividend-paying
stocks are a lot less volatile. The S&P 500 fell by almost 6%
in 2011, but dividend payers as a group rose 0.6% and delivered a
heftier 3% return when
for dividend payments. Even when you consider the stunning snapback
in stocks that occurred beginning in March 2009, the divided payers
still generated a total return that was 6.4% higher than the
. These are truly rain or shine stocks.
In fact, everyone at StreetAuthority knows that our readers are big
fans of dividends. They are among our most popular stories and our
most popular newsletters. (If you haven't checked out Carla
, for example, I highly recommend it.)
Funny thing is, companies aren't catching the trend, as the amount
of money they set aside from their
for dividends (known as payout ratios) remains quite low. As Wells
Fargo noted in a recent report, "companies may only just be
beginning to catch on to the fact that investors are keenly
interested in dividend paying stocks."
Indeed, a number of companies appear to prefer stock buybacks to
dividends: In the just the first few months of 2012, 14 companies
have announced plans for stock buybacks in excess of $1 billion. I
am personally in favor of stock buybacks when
are certifiably undervalued, but companies often seem to buy back
stock when they are at multi-year highs. Other companies initiate
stock buybacks simply to offset extremely generous stock
grants to executives and board members. That's why dividend
payments stand out as the surest way to return capital to
And those returns are about to get a lot higher. There were 256
dividend hikes in the S&P 500 in 2010, 342 increases in 2011,
and if recent trends are any guide, that number should be even
higher in 2012. Meanwhile, not a single company in the S&P 500
cut its dividend for the year ahead when the just-finished fourth
quarter results were announced.
Yet companies aren't doing enough. The dividend hikes have been too
modest, as companies still seek to retain most of their profits,
even if they already possess ample levels of cash for a rainy day.
Consider this: Going back to 1945, dividend-paying companies have
typically paid out 53% of their income in the form of dividends.
That figure has been trending down in the past 20 years, and now
sits at a post-war low of 27%. To get back to the long-term average
implies that dividends would almost double from current levels --
even before you account for rising profits in the years to come.
Looked at another way, the current
on the S&P 500 is 2.1%, well below the long-term average of
4.5%, implying greater than 100% upside for dividend payments as we
revert to the norm.
Looking at one industry in particular, financial services stocks
have historically paid out 34% of their income in dividends, though
that figure now stands at 22%. That's partially why I'm a big fan
. It's in my
$100,000 Real-Money Portfolio
partly because I think it might be capable of a $2 dividend within
a few years, which works out to be a 5.7% dividend yield based on
is another one of my holdings capable of supporting a yield in
excess of 5%.
is yet another one that could easily support a high-yield, but the
toy and game maker prefers stock buybacks.
If companies are not focusing on dividends as much these days, why
would they shift gears and start boosting the payout? Because aging
baby boomers demand it, and companies can't ignore them.
In just the past 12 months, investors have poured $4.6 billion into
VanguardDividend Appreciation F und (NYSE:
, while the
SPDR S&P Dividend ETF (NYSE:
has attracted another $3.3 billion. Risk-averse baby boomers are
flocking to dividends, while younger investors that can tolerate
greater risk primarily focus on share price
. Notably, it's the baby boomers who make up the fastest-growing
demographic among investors.
The long-term macro-economic backdrop also explains why dividend
investing may be the major theme for the coming decade. The U.S.
and European economies increasingly appear set to grow at a very
modest pace, hard-pressed to sustain gross domestic product growth
in excess of 2.5% to 3% for a number of years. Even that view may
be generous. In eras of low economic growth and correspondingly low
organic sales growth, companies settle into predictable rhythms
where a sufficient level of cash is on hand and much of the income
being generated gets returned to shareholders.
Some would argue that buying the
of blue-chip companies is safer than cashing in on their dividends,
which can be cut at any time. That's a sound argument if you think
is headed for trouble. But in a stable economy, investors are
rewarded for the emphasis on slightly riskier dividends. Consider
Eli Lilly (NYSE:
all sport higher dividend yields than their
yields, by an average of 75 basis points (or 0.75%). Thanks to the
, that really adds up. And potential share price appreciation is
just gravy on the cake.
Risks to Consider:
Risinginflation would lead to much higher bond yields, which
would make dividend yields comparatively less attractive.
As my colleague Carla Pasternak
, taxes on dividends may soon go way up. She says it's not a
foregone conclusion, and instead just a campaign platform at this
point. But if it does happen, then it would be wiser to own
dividend-paying stocks in your tax-shielded retirement accounts.
Regardless of where they're held, dividend-paying stocks have
proven to deliver solid market returns even as they bring less
Action to Take -->
Standard & Poor's focuses on 49 companies in the S&P
500 known as the "
." All of them have maintained or hiked their dividend for at least
25 straight years. Yet more than half of them yield less than 2.5%,
which falls into the "why bother" category as far as I'm concerned.
Among the higher-yield players among these dividend aristocrats
Leggett & Platt (NYSE:
with a 5% yield,
Sysco Corp. (NYSE:
Kimberly Clark (NYSE:
with a 4.1% yield, and
Abbott Labs (NYSE:
yielding 3.5%. These are all solid stocks that are likely to see
rising dividends in the future and should be considered core
holdings in any portfolio.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of T, ABT, HAS, F, C, in one or more if its "real money"