Dividend-paying companies have commonly been perceived as boring, low-return opportunities. In reality, they’re a great way to pump up the returns of any portfolio.
For example, Johnson & Johnson has increased its dividend every year for the past 50 years. Over the past decade, the company has boosted payout at an average rate of 12.4% a year. Investors are well served by the predictability of dividends to help stabilize and boost their portfolio earnings.
Even better than the return from a dividend payout is the potential of the stocks themselves.
Between 1972 and 2010, dividend-paying stocks in the S&P 500 returned 8.8%per year, while their non-dividend-paying counterparts returned a mere 1.4%. Even better, reinvested dividends have accounted for nearly 50% of total equity return since the 1930s.
And companies rarely tinker with their dividends. Even thinking about cutting dividends is considered an absolutely desperate move, although it might be the right one. For example, Citigroup and Bank of America were two companies that were near bankruptcy in the aftermath of the economic crisis, but they still didn’t slash dividends until they were forced by regulatory mandate.
A word of caution: not just any high-yielding dividend-paying stock will do. Abnormally high yields can be enticing, but also deceiving. There are times when a company’s yield is high because a company’s stock price has significantly declined.
To avoid a value trap, we suggest looking for dividend-paying companies that have a history of profitability driven by sustainable competitive advantages, strong business models, and an experienced management team. If you can then purchase them at a discounted price to their intrinsic worth, you have a winning combination.
Don’t underestimate the power of dividends >