Let’s Talk Dividends: In a Crummy Economy and Market, Payouts are Precious
No telling for sure as of this writing whether President Obama will get his jobs bill passed; whether the legislation would actually do much for the economy if it does become law; or whether the stock market would get excited even if a jobs law did revive economic growth. With all those ifs and more, it’s easy to make the case for a sideways-at-best equities market in coming months. If that’s so, what to do?
Focusing on dividends is never a bad idea. Rocket-like stock appreciation is always sexier, of course, and who doesn’t like the trajectory of this chart of Amazon’s (AMZN) market cap?
But thankfully many smart market commentators have in recent months pumped out persuasive articles on the power of dividends. We all know payouts are important, but being reminded helps encourage us to keep hunting for dividend-paying companies. Ben Baden at U.S. News argues that dividends represent the bulk, over time, of the return one sees in the S&P 500, far more than stock price appreciation. He also notes, in this primer, that dividend-paying companies tend to have solid balance sheets, and thus can withstand tough times.
Dividends are so powerful in driving overall return, that some portfolio touts will show you comparisons that exclude dividends, a scam Jason Zweig at the Wall Street Journal has warned readers about.
The market has been rewarding dividend-paying companies of late, notes Ben Levisohn at the Wall Street Journal, and he has some tips on how to choose payout stocks.
Given that the Federal Reserve is keeping interest rates super low, yields on corporate bonds and on U.S. Treasury securities are miserly. Where to look for income? Ken Fisher in Forbes argues that stock dividends can be the answer. As does Reshma Kapadia at Smart Money magazine.
Fisher and Kapadia are kind enough to throw in some nicely-yielding stocks for you to consider. For more up-to-date lists of stocks with attractive dividend yields, use the YCharts Stock Screener. Here, we’ve set it to display companies with above-$1 billion market caps, with dividend yields of 4% or more, and revenue growth of at least 5%. The list pulls up plenty of attractive companies. And if the stocks aren’t moving much these days, as the old saying goes, they pay you to wait.
The power of reinvesting dividends in company shares is covered, along with tax implications and other issues, in Paul Sullivan’s New York Times article on dividend stocks.
Of course, some market watchers complain that cash-laden companies are too chintzy in paying dividends. McDonald’s, say, given that it’s curtailed its growth, could certainly pay out more than it does.
Tax considerations – companies pay tax on profits, then you pay taxes on the portion of those profits paid out in dividend – are part of the picture. And William Baldwin at Forbes thus prefers stock buybacks to cash dividends.
Filed under: Investing Ideas