In January, I wrote about investing in dividend paying common stocks as a source of income which could potentially top yields offered on government bonds and certificates of deposit in today’s low interest rate environment.
I believe that the reason to focus the bulk of your stock ownership in dividend paying companies goes beyond the income stream. It increases your chance of a successful total return strategy, which combines the dividend income with appreciation of the share price of the companies over time.
Many studies have been done to separate companies into groups – those that pay dividends and those that do not. Subdivision of the group that pays dividends into categories of those which keep their divided payment steady and those which tend to regularly increase the dividend payment to the shareholders allows further analysis.
When economic times are good and the stock market is cruising along like back in the 1990s, investors tend to focus on companies that have the latest and greatest products or cutting edge services and not pay attention to a boring dividend payment. Of course, times aren’t always good (as we found out in the last couple years) and a review of longer-term history reveals consistent dividend paying companies have historically provided higher returns.
The large mutual fund company, Eaton Vance, recently updated a white-paper report comparing the results of different categories of companies in the S&P 500 Index based on their status as to paying a dividend (or not) and those increasing their dividend versus those that had stagnant or reduced dividends. The facts are compelling. The full report can be viewed or downloaded at our Web site (www.breitercapital.com) in the “Articles” section.
Here are a few high points revealed in the report:
1. Since 1926 the S&P 500 Index provided a 9.6 percent average annual total return. Dividends were 4.3 percent of the total and 5.3 percent was from capital gains.
2. The average yield on CDs and money market instruments since 1926 was 3.7 percent, so dividend income exceeded the yield offered by traditional savings vehicles.
3. More recently, since 1972, non-dividend paying companies as a group provided an average annual total return of .3 percent. Companies paying dividends averaged 8 percent annually during this time period and those which regularly enhance their dividend payment did the best with an 8.9 percent average annual total return over the last 35 years.
Another fact sometimes lost in the data is that, historically, companies which pay and enhance their dividends regularly tend to be less volatile during the inevitable stock market corrections. After the last couple years, investors are re-thinking their appetite for risk and investing in consistent dividend paying companies that may be just the ticket for some peace of mind.
I encourage you to view the full report at our Website, it is an easy read with conclusions I believe are well worth understanding.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.