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  • Dividend Aristocrats: More Income, Less Madness 3 comments
    Oct 29, 2010 5:04 PM | about stocks: WMT, JNJ, KO, XOM, GE, PFE, USB, CTAS, BF.B

    By Nanette Byrnes

    Dividends are back in style. With government bonds offering so little upside, the income they provide is appealing. And as the equity markets continue their wild sashay, the fact that dividend-bearing stocks are also often less volatile is another plus.

    Standard & Poors has for many years kept track of the companies in their S&P 500 Index which have increased their dividend for the past 25 consecutive years. There are  currently 42 firms in this index of dividend aristocrats. Among them: Wal-Mart (NYSE:WMT), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO) and Exxon (NYSE:XOM).  The Index of these stocks is up 7% this year, while the broader market isn’t even up 2%.  The Aristocrats’ 26.56% return last year beat the S&P 500, as the index has over the past 3 years, the past 5 years, and  the past 7 years too. With lower risk and a better dividend yield to boot.

    The downside of dividends is that they can be cut, at corporate discretion, without warning. And even the dividend upper crust felt the pain last year. Ten actually fell out of the index including General Electric (NYSE:GE), Pfizer (NYSE:PFE)  and US Bancorp (NYSE:USB).

    Only two climbed on: Jack Daniel’s maker Brown-Forman (NYSE:BF.B)  and conglomerate Cintas (NASDAQ:CTAS), which among many other things rents out uniforms.

    This year dividend cuts seem to have slowed. Howard Silverblatt, senior index analyst at S&P says in the first half of 2010 companies increased their annual dividend rates by $7.9 billion in total. In the first six months of 2009, they cut them by $4.9 billion.

    In a July 22 piece called 5 Ways to Keep Your  Cool in a Scary Market, Money’s Janice Revell writes:

    You can boost your chances of earning solid total returns by adding some high-dividend payers to your mix. Those regular payments can also help steady your portfolio when the market gets volatile, especially if you focus on companies with a history of consistently increasing payouts.

    During the 10 years ended 2009 — which included two brutal market collapses — shares of companies within the S&P 500 that consistently increased dividends returned 6.5% a year, according to T. Rowe Price, while the overall index lost just over 1% a year.

    The Dividend Aristocrats come from 10 different sectors of the economy. They may give you 42 shots at more income, less madness.



    Disclosure: no positions

    Disclosure: No positions
    Stocks: WMT, JNJ, KO, XOM, GE, PFE, USB, CTAS, BF.B
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  • Brad Case
    , contributor
    Comments (277) | Send Message
     
    Good thoughts, Nanette. There's actually some research being done by academics suggesting that paying high dividends may impose discipline on corporate decision-makers leading to better risk-adjusted returns. That research (at least the research that I know of) focuses on publicly traded REITs, which are required to pay high dividends (or, specifically, to pay at least 90% of their taxable income out to shareholders as dividends), but if it's true then it should hold true for non-REIT companies as well. Over the long run, risk-adjusted returns of publicly traded REITs have been better than for most other investments in the stock market.
    As soon as I can get to it, I'll do a post detailing those findings.
    30 Oct 2010, 07:40 AM Reply Like
  • Portfolioist
    , contributor
    Comments (8) | Send Message
     
    Author’s reply » Very interesting. Will look forward to reading that. Do dividends act as a counter weight to things like stock options which seem in some cases seem to increase the temptation for management to make riskier bets? Maybe dividends are a better solution than clawbacks and other ideas about moderating the risk motivation in executive pay.
    30 Oct 2010, 11:46 AM Reply Like
  • Brad Case
    , contributor
    Comments (277) | Send Message
     
    Good question, and offhand I don't know the answer. I'll give it some thought.
    3 Nov 2010, 09:44 AM Reply Like
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