Time to pay yourself back with rising dividends
More than ever, rising dividends are a strong incentive to buy quality stocks, says a U.S. advisory that recommends five dividend stocks.
The euro is hanging by its fingernails. The loonie is swooning.
The markets are sliding around like Charlie Chaplin on a roller skating rink.
And now we’re told we may not even get the interest rate hike we expected two weeks from now. Can’t we count on anything?
Yes. Dividends. Specifically, growing dividends.
Dividends are a source of security, says one U.S. advisory. They also “smooth out the volatility of portfolio returns.”
There’s another aspect of dividends that’s not often considered, adds Dow Theory Forecasts. A stock with growing dividends will pay back your original investment much faster.
And that knowledge “might make some investors more willing to buy and hold quality stocks,” it adds. This advisory has five such quality stocks to recommend.
But first, it illustrates what we can expect dividends to do for us.
Long-term security
Dividend yields have generally trended lower over the last 20 years, says the advisory. The large company stocks on the S&P 500 Index have had an income return averaging over 3 per cent only once since 1992.
One study also concluded that over the past 30 years, a $1,000 investment in large-company stocks produced an income return of about $2,427, a small portion of the total return of $24,375.
But that is the average. Growing dividends can produce more substantial results. In some cases, dividends alone “can pay back a shareholder’s original investment within 10 to 15 years.”
In short, it has the same effect as a long-term guaranteed income security (a bond or GIC) with capital gains throw in for good measure.
When dividends keep growing
The advisory gives an example. Pharmaceutical and diagnostic giant Abbott Laboratories (NYSE-ABT) is one of its A-rated stocks, those that have paid dividends for at least 10 straight years.
Suppose you buy one share of Abbott, says the advisory. (When it went to press, the price was $50. With the market correction, it is $47.)
If the stock price stagnates and the company never increases its annual dividend of $1.76 a share, says the advisory, you will recover your investment in 29 years.
But Abbott has raised its dividend at an annualized rate of 9 per cent over the past 10 years “and companies that have consistently raised their dividends tend to continue doing so.”
If the dividend keeps growing at that 9 per cent annual clip, you get your original money back in 14 years. Abbott’s current yield on that dividend, by the way, is 3.7 per cent.
Stockpiling cash
If dividend growth is the key, what are the prospects that dividends will keep on growing? Good, says the advisory.
On the S&P 500, dividend payments declined over the last six quarters. But in the March quarter, the number of dividend increases jumped over 41 per cent from the year before.
Total profits for companies in the index surged 206 per cent in the December quarter and should be up 53 per cent in the March quarter.
“Corporate America has been stockpiling cash, and strong operating results should spark even more companies to boost their payouts in the years ahead,” says the advisory.
This week’s market correction may be driving share prices down (and dividend yields up), but it is too soon to say what effect it will have on corporate profits in the months ahead.
It also makes companies with solid dividend histories look better. The advisory has four more to recommend.
The king of payback
Defense contractor General Dynamics (NYSE-GD) has accelerated its dividend growth in recent years. If the dividend continues to rise at an annual rate of 12 per cent, investors would recoup their original investment in 16 years “without taking price appreciation into consideration.”
The share price had risen 10 per cent in 2010 (to $75) before this week’s correction. It is now at $67.57 and yielding 2.5 per cent on the $1.68 dividend. Even before the correction, it traded at only 12 times trailing earnings, so the stock looks even cheaper at today’s price.
IBM (NYSE-IBM) has paid a dividend every year since 1916 and raised it each of the past 15 years. The quarterly dividend — $0.65 — has tripled in the past five years.
The payout ratio is a very modest 25 per cent, which suggests that IBM “can boost the dividend in coming years without sacrificing investment in growth initiatives,” says the advisory. It also cranked out over $14 billion in free cash flow last year. IBM yields 2 per cent on its dividend and is trading at $126.
Johnson & Johnson (NYSE-JNJ) has an even more impressive record of increasing than dividend than IBM. It has done so every year since 1963. Its dividend payout ratio is higher at 46 per cent, but it has more than enough cash to cover it all.
Generic drugs may pressure J&J in the years ahead, but its “broad product mix” should keep it growing. The shares trade at $61.22 and yield 3.5 per cent on the annual dividend of $2.16.
The king of payback may be Wal-Mart (NYSE-WMT). If it would “continue its 18% dividend growth it has managed over the past decade,’” says the advisory, “the dividends would pay back investors in 12 years.”
The dividend has increased every year since it was introduced in 1974. Wal-Mart is facing slower growth in its big box Supercenters and is looking to smaller urban stores and overseas growth to keep the cash flowing.
It trades at $52.05 and yields 2.3 per cent on its $1.21 dividend.
While the markets take pratfall after pratfall, the companies that pay you back with dividend cheques look better with each passing day.
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