By Eric Roseman
The hunt for safe dividend yields is a major theme this year as interest rates head lower across most advanced and emerging economies coupled with the perception that growth stock investing is too dangerous without an income cushion.
Though certainly not immune to the travails affecting domestic consumption, individuals still have to brush their teeth and floss among other daily rituals. And of course, they still have to eat.
Earlier this week, Procter & Gamble (PG) raised its quarterly dividend by 10% to $0.44 cents per share. The stock now yields 3.6% and trades more than 30% off its all-time high. P&G also makes Tide washing detergent, Pampers, Charmin toilet paper and Pringles chips along with a host of other fine products.
The dividend yield on P&G's common stock is 80 basis points more than ten-year Treasury bonds and about 50 basis points higher than the yield on the S&P 500 Index. Until the September-October crash, P&G held the line protecting shareholders' equity (see above chart).
Still, consumer-products makers, food and beverage companies and tobacco firms have struggled in this bear market as consumer's trade down or seek lower-cost generic brands.
Yet buying companies that raise their dividend is a sound investment strategy. It means these companies are making money and feel confident enough about their future cash-flow that they can hike the dividend stream. The trend is certainly in the opposite direction over the last 18 months with more than $75 billion dollars' worth of dividend cuts so far this year compared to about $45 billion for all of 2008. In addition to banks, many other companies are reducing or eliminating dividends to preserve cash-flow.
In addition to Procter & Gamble, Coca-Cola (KO) and Kimberly-Clark (KMB) also raised their dividends recently. Media magnate, Barry Diller, invested more than $10 million last month in Coke shares following the dividend hike announcement. Warren Buffett continues to hold a major stake in Coke since the 1980s.
Dividends, however, have meant less to the total return equation for stocks over the last 20 years because of share buybacks and a rising stock market from 1982 until two years ago. Dividends prior to 1995 were responsible for about 45% of a stocks' total return; but over the last 16 years or so that figure has been reduced to barely 12%. Now that's changing.
With stocks deep in the gutter over the last 20 months dividends are making a big comeback.
The historical relationship whereby dividend yields are about half of total stock market returns will play out again in this cycle amid a major consumer led recession and a severe credit crisis. Investors want yield and require cash flow.
Another sector providing big yields is the utilities area. The Dow Jones Utilities Index yields an effective 4.85% or 205 basis points more than benchmark Treasury bonds, while more attractive to investors on an after-tax total return basis. But even here investors face uncertainty ahead of possible regulatory changes and questions pertaining to the viability of some utilities' cash flow.
The way I see it, people still have to wash, eat and turn on the lights. Defensive stocks that pay regular dividends are worth their weight in gold in 2009 and probably beyond as income rules in the post-2007 Great Credit recession.