By David G. Wilson, Jr.
The Daily Record Newswire
Since the advent of cable business news some 25 years ago, seldom has there been mention of dividends or their importance in building wealth. New product introductions and acquisitions are more newsworthy and probably better for ratings than the latest dividend increase of a blue-chip stock. But dividends have been a very important component of the total return of stocks over the last 84 years, accounting for 40 percent of the total return. And it may be an even more important wealth builder for investors, especially retirees, in the future.
Many investors rely on fixed-income instruments to produce income and provide some protection against the gyrations of the stock market. Unfortunately, by historical norms, these income generators are paying extremely low rates of interest, and there appears to be no end in sight. Government officials have announced that they will keep rates low for an extended period, and we do not know how long. Rates could start climbing this year, but it could be several years before rates return to normal levels. So, how do retirees increase income without risking all that they have worked for over the years? While stocks involve greater risk, the answer may be to buy stocks in companies that consistently raise their dividends in good and bad times and that have done so for at least 20 to 25 years.
Stocks with rising dividends are one of the few ways investors could get a higher income in retirement. But care should be taken to not stretch for yield. Remember the old adage: “the higher the return, the higher the risk.” This holds true for dividend-paying stocks as well. Don’t chase the companies that yield 7 to 10 percent, but rather look for high-quality, blue-chip stocks that yield 2 to 4 percent that have been growing their dividend at least 8 to 10 percent a year for several years. With all the recent news about dividend cuts and suspensions, one might think that increasing-dividend stocks have become an endangered species. According to Standard & Poor’s, 55 companies in the S&P 500 cut their dividend, and 10 companies suspended their dividend all together. Ouch! But despite all the cuts, 86 companies still increased their dividend last year.
The power of rising dividends shouldn’t be overlooked. For example, let’s say an investor owned a stock that yields 3 percent and grows its dividend 8 percent a year — fairly common for many high-quality blue-chip stocks. In nine years, the investor will have received $43 in dividends on a $100 investment and, if there has been no price appreciation, the stock now yields 6 percent. But if it has appreciated to a level where it still yields 3 percent, the investor has a stock that has doubled and has returned $243 on a $100 investment. So, it’s no wonder that since 1972, companies that increased or began paying dividends returned 9.5 percent a year versus 6.8 percent for the S&P 500 Index, according to Ned Davis research. By the way, it should be noted that this hypothetical illustration does not reflect actual performance of any particular investment.
High-quality, rising-dividend stocks tend to offer downside protection and less volatility than stocks that don’t pay dividends, and may be one of the best ways to outpace inflation in the long term. Perhaps one of the most compelling reasons to own rising-dividend stocks is that demand also should swell as the number of retired baby boomers increases — possible good news for existing stockholders. There are numerous benefits to owning rising-dividend stocks. Take a closer look at these underappreciated, income-generating investments.
Of course, past performance does not guarantee future success. Changes in market conditions, or a company’s financial condition, may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments.
David G. Wilson Jr. is senior vice president of investments with Stifel, Nicolaus & Co. Inc., member SIPC and NYSE, in Portland, Ore. He has over 26 years of industry experience as a financial advisor. Contact him at 503-499-6260 or wilsond@stifel.com.
