Dividends – The Quiet Reward
With so much emphasis today on share price movement, one should not ignore another important feature of investing: Dividends. Along with capital appreciation, quarterly cash dividend payouts provide investors with a “total return” on their investments. As thebuttonwoodproject readers know, I put a lot of emphasis on dividend paying stocks when choosing candidates, as they not only provide real cash to investors, but can add a degree of downside protection in a stock’s price during market swoons. For example, a higher valuation for a share of stock which does not pay a dividend is based solely on its (potential) future performance and what investors perceive that performance translates into as a current value. But a stock with a dividend yielding, let’s say 4%, is less likely to plunge to unreasonable levels during market downturns, as investors will scoop up shares at lower share prices (and thus higher yields) giving needed price support to these dividend paying alternatives. Another characteristic when choosing blog candidates that are paying dividends is not just the absolute dollar amount and current yield, but the long-term growth of its dividend (past and estimated future). In addition, the ratio of the amount paid vs. the amount a company earns per share is very important. If the company is paying out too much of earnings in the form of dividends, it can signal a possible pay cut should operating conditions deteriorate. If the payout ratio is reasonable (let’s say below 40% of its available earnings), the dividend can often hold in times when profits temporarily fall. Stocks with gyrating dividend payouts or periodic eliminations of a dividend are looked upon less favorably by the investment community.
Below is a chart of the three portfolios and what each of the recommendations is providing in the way of a current dividend yield. With the exception of Internet giant Google and satellite TV provider DIRECTV, all the others pay dividends yielding from the stingy (less than 1%) to the very generous and are not limited to only the Income portfolio model, but the Conservative and Aggressive lists, as well.
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