Dissecting Barron's On Dividends

by: Roger Nusbaum

The Barron's cover story was about seeking a 4% yield from stocks. It was a broad look across many sectors in the S&P 500 at stocks that have the room to increase their dividends substantially or in some cases initiate a substantial dividend.

My take on dividends has been consistent. They are crucial to long term portfolio success, but I do not believe in owning high yielders or dividend growers exclusively. There was one point made early in the article that I think needs to be dissected because I think it distorts how markets tend to work.

During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011—all with 4%-plus yields—returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates.

Further down in the article is a table that notes the performance of each of the sectors in 2011. Utilities did the best at 14.8% followed by staples at 10.5% and healthcare at 10.2%. While there can be no absolutes, it is a good bet that in a year where the S&P 500 is flat, and some might say it was lucky to have been flat, it is going to be the defensive sectors that do better.

Things like utilities, healthcare and staples do better in years like 2011 for two reasons: The dividends of course, and more fundamentally, the steadiness of the demand for the products.

So far in 2012, the S&P 500 is up 4.58%, which is pretty good for three weeks. In that same three weeks, utilities are down 3.8%, healthcare is up 3.3% and staples are down 0.2%. Again, there are no absolutes but if 2012 is somehow a repeat of 2009, then these three sectors will very likely lag and the dividends won't mean much- as was the case in 2009. Of course 2008 was a terrible year for stocks and all three of the dividend sectors mentioned above outperformed.

For the long term, there is no question in my mind that dividends are crucial. But the assertion that dividend stocks will have a good year in 2012 because... is simply the wrong way to frame this. The other day I mentioned about the importance of thinking in long term increments like complete stock market cycles or even decade long chunks. The importance of the yield of the portfolio can be better understood in those time frames. In one year time frames, the more correct framing is that in a great year for stocks, dividend payers will usually lag.