A few months back, I wrote an article entitled Why, At 28, I'm Going With Dividends. As it turned out, this opinion column of mine stirred up quite a considerable amount of discussion on dividends, growth and retirement. To be perfectly honest, I learned a great deal reading many of the insightful comments provided by our brilliant community of Seeking Alpha members. Hey, I tell it like it is and you all are some smart folks out there. Trust me when I say I'll never take you for granted.
On February 22nd, I happened to have a birthday and turned 29. So, to keep the record straight I figured it might be a good time to reaffirm with my newfound wisdom why I will likely stick with dividends for my entire investing career. You might disagree with my approach -- and I can't help but respect your opinion -- but here are three more reasons why I still believe dividend investing is the most systematic and intelligent way to become independently wealthy.
1. You'd better believe it -- the power of compounding is real. I'll spare you the details as it's a fairly well-known concept. Just a reminder though that the "snowball" effect which happens with compounding is due to the fact your earnings, let's call them dividends, generate and produce more dividends and even more dividends as time progresses. In other words, your earnings produce more earnings and this process accelerates with time. Dividend reinvestment is one of the easiest ways to take advantage of this beautiful mathematical rule.
2. Dividend-paying companies generally have lower betas than their purely growth counterparts, meaning more return with a lower risk profile. Recent research in Financial Analysts Journal suggests sticking to low beta, low volatility stocks over the long run will produce superior gains and above average returns. As it turns out, the old adage you shouldn't be in income stocks if you have "x" amount of years until retirement may just be one of those sayings that sounds good in the locker room at the local gym. I'm not really buying it.
3. Companies that shell out earnings to investors in the form of a dividend are more likely to be mature and well-intentioned. Though it's a difficult concept to believe, mature, well-established companies that faithfully provide earnings to shareholders have a reputation to keep up. Not always, but often growth-oriented companies will -- let's be honest -- often find ways to waste money with "strategic" acquisitions or wasteful investment ventures. When a company makes a commitment to provide cash to shareholders on an ongoing basis, this often trumps other less profitable uses of its hard-earned cash, keeping its eyes on the road if you will. The great investment guru Peter Lynch coined the term "diworsification" to suggest companies often diversify themselves too significantly and subsequently lose track of what their business model really is. Dividend-payers are less likely to fall victim to this scenario.
Here are three companies which need no introduction and do a great job of honoring shareholders in their commitment to faithfully dish out dividends:
1. The Coca-Cola Company (KO) is a dividend aristocrat who has been raising its dividend for nearly 50 years. With its enviable dividend payment history, current yield of 2.9% and payout ratio of 51%, KO will likely be able to continue to dish out dividends for the foreseeable future. Coca-Cola is one of the most recognizable brands in the world and the company still continues to grow today, expanding to new regions and impressively increasing revenues annually. KO, much like MCD, is one of those stocks which demands a high P/E ratio but I constantly monitor its financials, looking for a good time to jump in. Perhaps 2012 will be my year to purchase shares and begin compounding its dividends for the long haul.
2. Aflac Incorporated (AFL) is another dividend aristocrat and happens to be my largest holding. It is currently sporting a dividend yield of 3% and safe payout ratio of 29%. This is a company that exemplifies a mature and well-intentioned brand and keeps its shareholders in mind each quarter, sharing its profits in the form of dividends. Seeing that I already hold a significant portion of my portfolio in AFL, I likely won't be adding to my holdings, but I look forward to reinvesting the dividend and feel comfortable placing my trust in a company with such a strong business model and history.
3. Verizon Communications Inc. (VZ) has been paying dividends since 1984 and currently has a yield north of 5%. Verizon's wireless segment is the fastest growing 4G network in the country and it continues to expand to new markets. More than 200 million people in the United States take advantage of Verizon's fast 4G LTE network speeds. With over $110 billion in annual revenue and nearly $14 billion cash on hand, I believe VZ will be able to weather any upcoming potential storms. It's always a good idea to have a few high dividend yielders in your portfolio and along with utilities, I like VZ for the gracious dividend payouts which hit my account every quarter.
So there you have it. I've shared with you three holdings I place my trust in to assist me with the power of compounding through the gracious disbursement of quarterly dividends. I look forward to sticking to my strategy of dividend reinvestment for years to come and can't wait to see the power of compounding take hold. For those of you out there with other strategies -- perhaps following technicals or going purely with growth -- I must say I respect your approach; but with that said, I'd much prefer to sleep well tonight knowing I'm holding low beta stocks and have the likelihood to outperform as I inch closer to retirement. To each his own!