We will soon launch AAII Dividend Investing, a new service devoted to income-producing stocks.
The idea for this service came in part from AAII members. We have received several requests for a model dividend portfolio. Given the historically low yields for bonds and the simple fact that many of our members are near or in retirement, it is not surprising to us that there is a demand for this type of newsletter.
But there is also a more fundamental reason: dividends matter.
As I write this in early December 2011, the S&P 500 is a few points below where it started the year. But the index still has a positive total return for 2011. How is this possible? Dividends.
If you bought the index last January, you would have earned nearly 2% in dividends, enabling you to earn a positive total return. Over the course of several years, this extra return differential adds up to a lot of money. And it is money that you can spend or reinvest, because it’s comprised of real cash payments.
How much of a long-term impact can this extra return make? Dividends account for more than 40% of the stock market’s total return. The 9.9% historical return for stocks since 1926 is driven significantly higher by dividends. Ibbotson Associates, which tabulates long-term historical returns, says that if dividends were taken out of the equation, the long-term return for stocks would fall to a more mundane 5.5%.
It’s not just at the index level that dividends matter; they also impact the return you will receive from investing in individual stocks.
For example, let me tell you about a stock we are considering for the AAII Dividend Investing portfolio, Genuine Parts Company (GPC). This distributor of automotive and industrial parts has consistently paid a dividend every year since 1948, generates free cash flow, is projected to grow earnings in the future and trades with an attractive valuation.
Equally impressive, Genuine Parts has increased its dividend payment for 55 consecutive years. If you bought the stock in December 2006 and held onto it until this issue went to press, those rising dividends would have boosted your return by 40%. To be clear, the dividends added an additional 40% return on top of the stock’s 50% gain in price.
Granted, many stocks have not fared as well as GPC has, but those that paid dividends helped cushion the blow of the turbulent market conditions. Just as dividends can boost the return of a rising stock price, they also partially offset the loss from a falling stock price.
I also like dividends for another reason: I think they make corporate executives friendlier to shareholders. Dividends are a commitment by the company to distribute a portion of earnings to shareholders on a regular basis. Once a company starts paying a dividend, it is reluctant to cut or suspend it. I believe this lowers the chance of corporate cash burning a hole in an executive’s pocket. After all, if a company has been raising dividends for 55 years, as Genuine Parts has, it is likely that the CEO is going to be more prudent with his business decisions, and that’s good for shareholders.
While dividends are good, some dividend stocks are better than others. In particular, well-financed companies with a history of earnings and dividend growth, positive free cash flow, low to reasonable valuations and good outlooks are better positioned to enjoy both price appreciation and higher dividends in the future. These are the type of stocks we are seeking out for AAII Dividend Investing.
A subscription to AAII Dividend Investing will educate you on how to become a successful dividend investor and give you access to a model portfolio of 24 hand-picked dividend-paying stocks. Subscribers will also receive weekly updates and a monthly newsletter providing more in-depth analysis and education. (We will be charging a fee to cover the costs so that AAII members who do not subscribe are not indirectly paying for the service.)
You can get a behind-the-scenes look, notification of when AAII Dividend Investing goes live and a special charter price by registering at www.aaiidividendinvesting.com.
—Charles Rotblut, CFA, Editor, AAII Journal