Dividend stocks and the race for profits
History tells us that dividend stocks will earn greater profits over time, says a U.S. advisory that features three buys — one of them Canadian.
We’ve had a lot to say about dividends lately.
But that’s only natural. In an unpredictable stock market, dividends provide tangible rewards even as stocks rise and fall.
Today we’re going to see how well dividend stocks perform against their non-paying counterparts.
Many claim that strong, confident dividend-paying stocks do better even though they divert a good deal of their cash to the shareholders.
Others claim that non-paying stocks naturally grow faster by putting their cash to work for growth.
Turns out they’re both right, says Dow Theory Forecasts.
We consult this U.S. advisory frequently because it conducts detailed studies that offer investors insights into major trends.
In this case, the advisory is not debating whether or not dividend stocks are a good investment — it firmly believes they are — but whether or not they can keep up in the capital gains race.
Then it points to three dividend stocks that have gotten ahead in the run for profits. One of them is Canadian.
Dividend stocks trail
The advisory publishes a chart on the stocks it follows using its patented measurement system, Quadrix.
Considering rolling 12-month periods since 1990, it discovers that dividend-paying stocks returned a 14.1 per cent return. Those that paid no dividends returned 19.3 per cent.
Chalk one up for the dividend naysayers.
But the advisory went further, breaking the past 20 years into five-year periods. During three of the four periods, dividend stocks still trailed. There were specific reasons for this, however.
Buying begets buying
One trend that went against dividend stocks was the market bubble of the late 1990s.
During that feeding frenzy, investors “flocked to technology stocks and others that did not pay dividends,” says the advisory. “Buying tends to beget buying, and the returns of non-dividend payers were astronomical.”
Another was the real estate meltdown of 2007 and 2008. This hit “the dividend-rich financial sector the hardest,” says the advisory.
The advisory also did a “geometric” study, which measures the spread between different groups of stocks and gives a truer picture of the change in wealth over time. The gap is smaller, but non-dividend payers still win.
But the past 20 years are not typical. Research going back to 1928 shows that between that year and 2009, dividend-paying stocks returned more than non-payers. $1,000 invested in high-yield stocks at the start of 1927 would have grown to $4 million by the end of 2009, more than eight times the value of a portfolio containing stocks that did not pay dividends.
In short, history is on the side of dividends.
Four points to remember
History is all well and good, but what lies ahead? There are four points to remember, says Dow Theory Forecasts.
First, dividend-paying stocks are less volatile. They deliver better risk-adjusted returns than non-payers. That does not always work out to more money, but it does work out to less anxiety.
The highest yielding stocks are not your best bet. Very high yields, of course, usually result from falling share prices. But while a solid 3 or 4 per cent yield is desirable, it does not necessarily promise better returns.
Low payout ratios do yield high returns. “This makes intuitive sense,” says the advisory, “since a low payout ratio bespeaks a company with sufficient earnings power to grow its dividend over time while still investing in its business.”
The fourth point may be the most important. The dividend stocks that consistently rate the highest are those that raise their dividends.
Three stocks to buy
The three stocks the advisory highlights all have a history of raising their dividends. The first is a Canadian stock featured in our last report from this advisory (see Daily Buy-Sell Adviser, July 13), only this time the emphasis is on its dividend history.
The stock is cable giant Rogers Communications Inc. (TSX-RCI.B: NYSE-RCI). Although it has been in business in one form or another since 1920 (it started with movie theatres), it did not pay a dividend until 2000.
The dividend has shot up since, to $1.28, and the yield is a “generous” 3.4 per cent, says the advisory. The dividend has risen over 20 per cent this past year. Yet the payout ratio is just 43 per cent of trailing earnings, well below the 72 per cent average of stocks yielding 3 to 4 per cent.
Trading at $37.40, Rogers is a Focus List Buy (best buy for the next 12 months) and Long-Term Buy (best buy for the next 24 months).
IBM (NYSE-IBM) needs even less introduction than Rogers. This long-standing tech giant has increased its dividend at an annualized rate of 22 per cent over the past three years.
The company pays out a mere 25 per cent of its profits in dividends, well below the average for stocks yielding 2 to 3 per cent (it yields just over 2 per cent on $2.60). It is expected to continue its double-digit growth this year. Trading at $128.41, it, too, is a Focus List and Long Term Buy.
Less than 15 per cent of the tech stocks this advisory follows pay dividends, but Intel (NASDQ-INTC) has paid one since 1992 and has raised the dividend 20 per cent in the past five years.
The $0.63 dividend yields close to 3 per cent and “the semiconductor giant’s balance sheet — and its recent dividend history — suggest the payout will continue to rise in the future,” says the advisory.
Trading at $21.71, this stock is also a Focus List and Long Term Buy.
Like the tortoise in the fabled race with the hare, this advisory suggests, dividend stocks may fall behind from time to time. But in the long run, they can be counted on to win the race.
|
E-mail this article
Printer-Friendly
