Dividend Paying Stocks

Dividend Paying Stocks

The new Normal is to grab yield where you can, and for many investors, dividend-paying stocks are a solution.

For those of us who started our investing careers in the late 1980’s, the notion of allocating money into dividend-paying stocks for the sake of yield seemed ultra-conservative and almost laughable- why would we be content to collect single-digit returns when the equity investment landscape was filled with exciting companies and opportunities that would appear to have much greater returns.

Jump forward to February 27th, 2012

Americans have a deep distrust for the stock market. We have witnessed confidence-shaking volatility (although it has TEMPORARILY subsided), which is enough to rattle the nerves of Wall Street’s finest Portfolio Managers.

Interest Rates on bank accounts and bonds are dismally low.

Dividend Paying stocks are back in vogue.

Sign of The Times

Some of Wall Street’s largest firms are now marketing Dividend Funds. Pimco (traditionally known as a bond fund) launched two dividend-focused stock funds in December of 2011.

Adding to the allure for Dividend-yielding stocks has been the recent performance of high-profile companies such as Disney, Microsoft, Amgen and Starbucks, each raising their dividend by 25% or more, in 2011. Even the 800 pound gorilla, Apple, is considering a dividend for the 1st time since 1995.

Investors want to have equity exposure with the added comfort of a dividend, which reminds us of sentiment during the early 1950’s, coming out of the depression and World War 2.

In the second half of the 1950’s, when stocks roared, reinvested dividends made up 29% of the S&P’s return. As stocks moved higher, investors shied away from dividends towards rapid capital gains.

Strong Underlying Performance

Today, investor appetite for dividend-paying stocks is increasing, proven by the fact that while the S&P 500 was flat for 2011, Genuine Parts Company's stock was up 19%, Exxon Mobil’s shares were up 16% and Coca Cola shares increased by 6% during the same period. These three stocks are included in the S&P 500’s “Aristocrats” -51 companies that have raised their dividends every year for at least 25 years.**

Another star has been McDonald’s Corp., which has boosted their dividend payout 87% since early 2008, while the stock has nearly doubled during the same period.

Are dividend-paying stocks still a good Value? Yes. The average S&P 500 stock’s P/E ration is 13, based on 2012 profit, which is ½ what it was in the late 1990’s.

Current average dividend payment on many blue-chip stocks is equivalent to a yield of “2 to 4% on the price of the shares, where a 10 year treasury note pays 1.98%.”*

S &P Companies this year are expected to pay $263 billion this year, up 9.1% this year from 2011.*

Dividend-Yielding Stocks

Benefits [private_monthly]

· Fixed-rate bonds don’t provide inflationary protection of Dividend-paying stockss

Investors can get the best of both worlds with stock appreciation + dividends.

Dividends get taxed at 15%, where Bond and bank interest is taxed at ordinary rates, up to 35%.[/private_monthly]

Risks

Underlying Stock Depreciation.

Reduction or cancellation of dividend.

Stock-Dividend investing is a long term strategy, which hasn't worked well over the last decade

Def-con 5 scenario- in 2008, General Motors suspended dividend payments and one year later filed for bankruptcy protection, turning its shares worthless.

Summary

Dividend paying stocks should be a part of any income-generating portfolio, and recent strong corporate earnings should add confidence to dividend thirsty investors. Pay attention to a company’s payout ratio-the percentage of annual earnings paid to shareholder via dividends. The estimated payout ratio for 2011 was just 30% for the S&P 500 companies, a record low percentage. This indicates that there’s room to increase dividend payouts.

Trade smart,

The Wiz

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