Stock Dividends: The Difference Between Success and Failure
by Floyd G. Brown, Advisory Panelist, Investment U
Friday, March 7, 2008: Issue #772
Many people who began investing during the tech craze of the 1990s were taught to ignore stock dividends. The logic was that company managers who couldn’t adequately reinvest in their own business for growth were probably a bad risk for any investment dollars.
Warren Buffett famously has never paid a stock dividend at Berkshire Hathaway because he wants to reinvest every dollar of free cash flow himself.
But neglecting dividend-paying companies hurts investor returns…
At the turn of the century, and with the change of tax treatment on dividends, money began pouring back into firms that paid stock dividends. (A prominent feature of the much-maligned Bush tax cuts included tax-code changes that dropped the rate for dividends from high ordinary income levels - 35% in the top bracket - to a maximum of 15%.)
The Power of Stock Dividends
Bernstein Global Wealth Management prepared the amazing chart below, which demonstrates the power of stock dividends over the long term.
The Bernstein study concluded, “It should therefore come as no surprise that dividends have been a major component of growth in an investor’s return over time. Remember, calculations of a stock’s performance in a portfolio are based on total return, i.e., the annual price appreciation (or loss) plus dividends.”
One dollar in 1926 (when market data first became reliable) invested in large-cap U.S. stocks would have grown to nearly $2,300 by 2004. But the Bernstein report shows that if you remove investing in dividend stocks - and the magical effect of compounding those dividends - then that same dollar would be worth a meager $87.66.
A similar study by Standard & Poor’s showed the same results over a different time horizon. The study of total returns (price appreciation plus dividend income) shows that payers of stock dividends outdistanced non-payers by 1.9% annually from 1980 through 2003.
Are there any attractive stock dividend payers right now? You bet…
3 Blue Chip Stock Dividends With Mouth-Watering Yields
Because 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 10-Year Treasuries yielding below 3.8%, it’s easy to find sound companies that have a higher yield.
I suggest researching some of the following blue chips for long-term income and capital appreciation:
- AT&T (NYSE: T): This telecom giant is yielding a safe stock dividend of 4.1%, and it is seeing growth in both its wireless and broadband units. This growth will translate into share appreciation down the road.
- Bristol Myers (NYSE: BMY): This pharmaceutical company’s prospects are looking up with a good pipeline of new drugs, and it pays an eye-popping 5.3% stock dividend. The last few years have been painful for BMY, but its restructuring has paid off.
- Dow Chemical (NYSE: DOW) This diversified chemical company is a great bet on continued worldwide economic growth. Dow is well diversified across a number of industries, from plastics to agriculture. And it has geographic diversification, too. Plus, it pays a lip-smacking 4.3% stock dividend.
Final point to remember: Consider buying high-yielding stocks in retirement accounts. That way you can improve the tax treatment on your stock dividends… and not have to worry about a tax bill until you begin to make withdrawals.
Good investing,
Floyd
Today’s Investment U Crib Sheet
- Here are some key terms to understand when investing in companies that pay stock dividends:Declaration Date: The date on which the board of directors of a company announces the amount of the next stock dividend and its ex-dividend, record and payment dates.Ex-Dividend Date: The date on which, or after, the stock trades without a dividend. So if you buy the stock on or after the ex-dividend date, you will not receive the next dividend. If you sell a stock before the ex-dividend date, you will not receive the dividend (the buyer will receive the dividend). If you sell after the ex-dividend date, you will receive the dividend (the buyer will not).Record Date: The date the company determines the list of shareholders who qualify for the stock dividend. To be a shareholder of record, you must own the stock at least one day before the ex-dividend date.
Payment Date: The date on which the stock dividend is paid to shareholders of record, in the form of a dividend check, or a credit to your account.
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20 Responses to “Stock Dividends: The Difference Between Success and Failure”
Comments
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August 13th, 2008 at 1:16 pm
[...] Siegel suggested buying high-dividend-yielding stocks. His research shows that much of the returns of the market are the result of compounding dividends. [...]
August 13th, 2008 at 2:20 pm
[...] finished one of those odd 10-year periods when stocks have actually done considerably worse. With stock dividends reinvested, the S&P 500 has compounded at a scant .65% over the past decade. History shows that [...]
August 13th, 2008 at 2:28 pm
[...] Earnings-per-share (EPS) grew at 3.3% and price-to-earnings (PE) ratios grew at 0.7%. Reinvested stock dividends contributed 4.8% - more than half of the total return. Favor a stock with dividends for this very [...]
August 13th, 2008 at 2:58 pm
[...] Our parents suffered a similar fate while we were partying our way through the 1970s.Their experience tells us that instead of a CD yielding 4%, a better alternative would be stocks in sectors that can hold up in inflationary times - stocks with rich dividends. [...]
August 22nd, 2008 at 3:42 pm
[...] [...]
August 26th, 2008 at 11:44 am
[...] and looks at three companies with above average payouts right now in Investment U Issue #772, Stock Dividends: The Difference Between Success and [...]
September 12th, 2008 at 8:48 am
[...] yield, but the dividend payout ratio. This is the percentage of earnings directed to paying stock dividends, and it shows us if a company can maintain a level or growing annual [...]
October 13th, 2008 at 3:48 pm
[...] load mutual funds. If it is the regular payments you desire, then look for funds that pay adequate stock dividends, and set up regular withdrawal payments.And be on your guard for the next “risk free” [...]
October 21st, 2008 at 1:00 pm
[...] of their unique tax status, they are required to distribute earnings to shareholders, often paying fat dividends. And with the recent correction, many of these firms’ share prices are trading below the [...]
October 22nd, 2008 at 1:41 pm
[...] Stock Dividends: The Difference Between Success and Failure [...]
October 29th, 2008 at 9:41 am
[...] course, there are pitfalls when it comes to investing in dividend-paying stocks too. Here are three things to look out [...]
October 31st, 2008 at 8:55 am
[...] course, there are pitfalls when it comes to investing in dividend-paying stocks too. Here are three things to look out [...]
November 4th, 2008 at 11:07 am
[...] - Stock Dividends: The Difference Between Success and Failure: Issue [...]
January 13th, 2009 at 12:03 pm
[...] investments all pay handsome stock dividends like clockwork. And they avoid the volatility swings that now define the stock market, too. What an [...]
February 5th, 2009 at 11:32 pm
[...] Still, critics point out that anyone who bought at the 1929 market peak didn’t break even until 1955 - a long time even for the most patient buy-and-holder. This criticism ignores the power of dividends: [...]
April 16th, 2009 at 9:27 am
[...] 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 [...]
May 7th, 2009 at 8:25 am
[...] Earnings-per-share (EPS) grew at 3.3% and price-to-earnings (PE) ratios grew at 0.7%. Reinvested stock dividends contributed 4.8% - more than half of the total return. Favor a stock with dividends for this very [...]
May 7th, 2009 at 8:26 am
[...] finished one of those odd 10-year periods when stocks have actually done considerably worse. With stock dividends reinvested, the S&P 500 has compounded at a scant .65% over the past decade. History shows that [...]
May 26th, 2009 at 4:14 pm
[...] 5.4% dividend yield doesn’t hurt either. (If you buy Lorillard shares today, you will be entitled to the next [...]
July 2nd, 2009 at 1:40 pm
[...] are the four main reasons I believe this dividend is [...]