After years on the decline, dividends are making a comeback. More companies are beginning to reward stock shareholders, along with dividend-related exchange traded funds, by issuing larger payouts.
According to S&P Dow Jones Indices, S&P 500 companies will pay out cash dividends of $281 billion over 2012, or 17% higher than 2011 and 13% above the last record high in 2008, writes Jason Zweig for The Wall Street Journal.
Dividends have been on a declining streak as companies switched to share repurchases, or "buyback," plans that swapped the company's excess cash for their own company stocks. Under this plan, the company would increase the value of its shares by raising the earnings of the remaining shares.
While boosting value may be appealing, retail and institutional investors have not been biting over the past decade, with deep bear markets scaring away equity pickers -- individual investors funneled almost $1 trillion more out of U.S. stocks than they put back in. Today, investors are asking more for betting on stocks.
"Investors are saying, 'If you want me to take the inherent risk of owning an equity, then I want a meaningful cash dividend to compensate me for that risk,"' Lawrence Stranghoener, chief financial officer of Mosaic, said in the WSJ article.
This shift to higher dividends has also occurred before. In the 19th century, when almost all returns came from dividend income, "the stock price stayed relatively steady," economic historian Peter Rousseau of Vanderbilt University said in the article. "Equities in the 19th century functioned much like bonds do today, except that the dividends fluctuated much more."
Some dividend ETFs:
- iShares Dow Jones Select Dividend Index Fund (DVY) 3.49% yield
- iShares High Dividend Equity Fund (HDV) 3.28% yield
- SPDR S&P Dividend ETF (SDY) 3.14% yield
- Vanguard High Dividend Yield Index Fund (VYM) 2.97% yield
- Vanguard Dividend Appreciation (VIG) 2.08% yield
- WisdomTree Dividend Top 100 Fund (DTN) 4.57% yield
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own DVY.