Dividend Paying Stocks: Why This Chart Says It All… Plus 7 Ways to Invest
by Mark Skousen, Advisory Panelist, Investment U
Wednesday, November 14, 2007: Issue # 731
In doing research for my latest book, Investing in One Lesson, I came across an incredible chart that took my breath away. It revealed what I now believe is the single best strategy for investors - investing in dividend paying stocks, doing this will:
1. Help you avoid making big mistakes in the stock market;
2. Increase your chances of beating the market; and
3. Be less volatile than the rest of the market.
Just look at the chart below, courtesy of Ned Davis Research.
According to the most recent studies, dividend-paying stocks outperform non-dividend paying stocks by a wide margin.
Over the past 35 years, non-dividend paying stocks have gained an average annual return of 2.5%. That’s less than T-bills. But dividend-paying stocks have averaged an annual return of between 8.9% and 10.9%. That’s a huge difference.
Look at it this way…
The Power of Dividend Paying Stocks
If you invested exclusively in a diversified portfolio of non-dividend paying stocks (so called “growth” and penny stocks), an investment of $100,000 in 1972 would be worth $240,000 today. Not bad, but not good, either.
If you invested in a diversified portfolio of dividend-paying stocks, your $100,000 would be worth $3,223,000 today. Now that’s worth talking about. And here’s the thing…
If you invested in a portfolio of dividend growers and initiators, your $10,000 would be worth $4,059,000 today. Over $4 million. For retirees, you’ve hit the jackpot.
Moreover, the growing dividend payers held steady during the long bear market of 2000-03. They didn’t lose money.
Why is this shocking?
First, because most investors and analysts think that dividend payers are stodgy, conservative companies in mature industries that can’t possibly grow rapidly like the technology stocks. According to this traditional view, paying dividends is a sign of weakness, that the company has nothing better to do with its profits than return it to the shareholders.
Second, most fundamental analysts consider earnings, not dividends, the key indicator of success.
Avoid “The Growth Trap”
Brokers usually tantalize their clients with hot tips about new and bold technology breakthrough stories, and investors bite. Big mistake.
The fact is, most technology “growth” stocks fail to deliver. Jeremy Siegel, the Wizard of Wharton, calls it the “growth trap” in his book, The Future for Investors…
“The most innovative companies are rarely the best place for investors,” he boldly declares.
Why? Because investors invariably overpay for tech stocks.
And Peter Lynch, the legendary money manager of the Magellan Fund, confesses, “I note with no particular surprise that my most consistent losers were the technology stocks.” Well, it’s a surprise to me.
Dividend Paying Stocks: The Safest, Best Performing Strategy
Where can one consistently find value in quality companies that are likely to succeed? The answer is simple: Buy a portfolio of stocks that pay rising dividends, or that start paying dividends. There’s plenty to choose from…
1. High-dividend U.S. stocks, funds and ETFs
2. High-yielding foreign stocks and funds
3. Rising dividend stocks and funds
4. High-yielding Dow stocks
5. Business development companies (BDCs)
6. Real estate investment trusts (REITs)
7. Energy and commodity stocks
There are several Exchange-Traded Funds (ETFs) that specialize in rising stock dividends. My favorite is the Morningstar Dividend Leaders Fund (FDL), with a yield of 3.6%. I also like the WisdomTree International Top 100 Dividend Fund (DOO) - a great way to diversify internationally and get paid while you wait for stocks to go up.
Good trading,
Mark
Today’s Investment U Crib Sheet
We’ve covered quite a few ETFs recently. Here’s a recap, and the articles in which they’ve been mentioned:
- Investing In Gold: The Market Vectors Gold Miners (AMEX: GDX) is a fund linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. It captures the performance of the entire sector in a single, well-diversified investment.
- Closed End Funds: The Western Asset Global High Income Fund (NYSE: EHI). This is an extremely flexible fund that can invest in high-yield or high-grade bonds, governments or corporates, in any market, anywhere in the world. As market conditions change, the fund can adjust its strategy to take advantage of fluctuations.
- Sovereign Wealth Funds: The Dow Jones Global Titans Fund (AMEX: DGT), which holds 50 of the world’s largest publicly traded companies. Full story.
- Diversified Commodities: The Rydex Commodities Fund (RYMBX) strives to replicate the Standard & Poor’s Goldman Sachs Commodity Index, which tracks 24 products in five sectors - energy goods like oil and gas, industrial metals like copper and nickel, precious metals like gold and silver, and agricultural products like cotton, coffee and livestock. (Energy products account for 70% of its value.)
- Commodities Trading: The PIMCO Commodity Real Return Fund (PCRDX), which seeks to match the performance of the Dow Jones-AIG Commodity Index. This index is actually broader than the Goldman Sachs index because no one sector can account for more than 33% of the total value.
- iShares ETFs: Choose the iShares MSCI EAFE Index (NYSE: EFA) for developed markets. And buy the iShares MSCI Emerging Markets Index (NYSE: EEM) for emerging markets.
- Vanguard Funds: Here are three: The Vanguard Short-Term Investment Grade Bond Fund (VFSTX) and the Vanguard Tax-Exempt Money Market Fund (VMSXX).
 |
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Related Articles:
- Nucor (NYSE: NUE) & The Golden Dividend Ratio
- Investing In Dividend-Paying Stocks: A “Strong Buy” Since 1935
- Stocks for the Long Run: 7 Market Conclusions from Wharton Professor Jeremy Siegel
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August 26th, 2008 at 3:50 pm
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[...] of the ugly stock market over the last few months, I see real opportunity in dividend-paying stocks. As investors have rushed to the safety of Treasuries, the yields on the notes have fallen. With [...]
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