What Dividend-Paying Stocks You Should Own
Dividend-paying stocks have made the news lately. Of course, with Japan and the gyrations of the markets, the news really has been skewed to those events. But let's take a break from that and talk a bit about dividend-paying stocks, OK?
Actually, lately I've seen more media blurbs about dividend-paying stocks for a few years now. The reason it's been a while since we've seen much about dividend-paying stocks before that is that stocks paying dividends fell out of favor for so long. They fell out of favor because of the great stock bull market that started around 1980 and lasted until either 2000 or 2007, depending on how you gauge these things. What happened during that bull market was that dividend-paying stock prices kept going up faster than the dividends the companies paid, so dividends became a much smaller percentage relative to the price of the stocks. So, for example, if Exxon paid a 10% dividend on the money you invested in their stock in 1974, it was paying around 1% in 2000. Ergo, people paid less attention to dividends. They were making money more on the increase in the stock price vs. the dividend they were paid every year. At least that's how a lot of people saw things.
I remember being at a meeting with a big client at a big bank I worked for where the client told the portfolio manager he didn't care about dividends. The only thing he cared about was having stocks that would go up in price. The guy was pretty rich by any standard. Shows how dumb even rich folks can be sometimes about money. Why do I say "dumb"? Because there have been a whole slew of studies that show that dividends really matter when it comes to buying stocks.
But there's a problem with studies like this. What happens is when people find out dividends matter, they go out and just buy dividend-paying stocks, the higher the dividend the better. That doesn't work. Some stocks pay high dividends because their price has fallen so much, it's low relative to the dividend. And if the price fell for a good reason - if the business is sick or broken - what's going to happen is the company will cut the dividend - maybe even right after you buy the stock.
There are other issues with dividend-paying stocks you need to be aware of, but I recently came across an interesting study and I want to share what I learned with you. It's from Ned Davis, a highly respected research outfit.
The study compares the returns of five categories of stocks over the period 1972 - 2004. The four categories are: 1) stocks that don't pay dividends; 2) stocks that cut or eliminated their dividends; 3) stocks that didn't change their dividends; 4) stocks that increased of initiated dividends; 5) all dividend-paying stocks.
The results: The two worst categories were stocks that didn't pay dividends and stocks that cut or eliminated dividends. Next were stocks that didn't change their dividends. Second best was the all-encompassing "dividend-paying stocks."
But the big winner was stocks that increase or initiated dividends between the years 1972 - 2004.
I don't have data since then, but I would suspect the results would be just about the same. The important point here is that if you're going to buy dividend-paying stocks, you're best bet is to find stocks that have increased their dividends over time, sometimes referred to as "dividend growers." Also, stocks that recently initiated a dividend should do as well as stocks that increase their dividends.
So if you're looking for good dividend-paying stocks, look for stocks that increase their dividends, especially stocks that have done so for a long period of time (years), not just any old dividend-paying stock.
And if you rely on dividends for current income, when you buy stocks that increase dividends, your stream of income will increase over time - maybe a nice way to offset inflation, right?
Actually, lately I've seen more media blurbs about dividend-paying stocks for a few years now. The reason it's been a while since we've seen much about dividend-paying stocks before that is that stocks paying dividends fell out of favor for so long. They fell out of favor because of the great stock bull market that started around 1980 and lasted until either 2000 or 2007, depending on how you gauge these things. What happened during that bull market was that dividend-paying stock prices kept going up faster than the dividends the companies paid, so dividends became a much smaller percentage relative to the price of the stocks. So, for example, if Exxon paid a 10% dividend on the money you invested in their stock in 1974, it was paying around 1% in 2000. Ergo, people paid less attention to dividends. They were making money more on the increase in the stock price vs. the dividend they were paid every year. At least that's how a lot of people saw things.
I remember being at a meeting with a big client at a big bank I worked for where the client told the portfolio manager he didn't care about dividends. The only thing he cared about was having stocks that would go up in price. The guy was pretty rich by any standard. Shows how dumb even rich folks can be sometimes about money. Why do I say "dumb"? Because there have been a whole slew of studies that show that dividends really matter when it comes to buying stocks.
But there's a problem with studies like this. What happens is when people find out dividends matter, they go out and just buy dividend-paying stocks, the higher the dividend the better. That doesn't work. Some stocks pay high dividends because their price has fallen so much, it's low relative to the dividend. And if the price fell for a good reason - if the business is sick or broken - what's going to happen is the company will cut the dividend - maybe even right after you buy the stock.
There are other issues with dividend-paying stocks you need to be aware of, but I recently came across an interesting study and I want to share what I learned with you. It's from Ned Davis, a highly respected research outfit.
The study compares the returns of five categories of stocks over the period 1972 - 2004. The four categories are: 1) stocks that don't pay dividends; 2) stocks that cut or eliminated their dividends; 3) stocks that didn't change their dividends; 4) stocks that increased of initiated dividends; 5) all dividend-paying stocks.
The results: The two worst categories were stocks that didn't pay dividends and stocks that cut or eliminated dividends. Next were stocks that didn't change their dividends. Second best was the all-encompassing "dividend-paying stocks."
But the big winner was stocks that increase or initiated dividends between the years 1972 - 2004.
I don't have data since then, but I would suspect the results would be just about the same. The important point here is that if you're going to buy dividend-paying stocks, you're best bet is to find stocks that have increased their dividends over time, sometimes referred to as "dividend growers." Also, stocks that recently initiated a dividend should do as well as stocks that increase their dividends.
So if you're looking for good dividend-paying stocks, look for stocks that increase their dividends, especially stocks that have done so for a long period of time (years), not just any old dividend-paying stock.
And if you rely on dividends for current income, when you buy stocks that increase dividends, your stream of income will increase over time - maybe a nice way to offset inflation, right?
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