Investing In Solid Companies With A Record Of Increasing Dividends Wins Over Time

Right Kind of Dividend Makes a Difference, an informative article about the belt-and-suspenders virtue of buying and then holding blue chip dividend paying stocks over time, argues the case thusly:

"Dividends still pay. . . . Investors can still do well in 2012 by betting on big, dividend-paying companies amid a volatile environment. Indeed, these payers were often the difference between making or losing money on the S&P 500 last year.

The S&P 500 index finished 2011 slightly in the red, but its total return, including dividends, came to 2.1%. This isn't unusual; except during sharp rebound years, market returns are typically driven by dividend-payers. The total return for dividend stocks has topped nonpaying stocks every year since 2000 except for 2003 and 2009, according to S&P. And the gains that dividend-focused investors might have missed in those years are partly offset by their shallower losses during steep market selloffs.

Given where we are in the current market cycle, with the strong rebound year of 2009 past, it would be highly unusual for dividend-payers to lag behind the market this year. Investors should also keep the power of compounding in mind: $10,000 invested in nondividend-paying stocks in 1979 would be worth about $250,000 as of 2010. The same amount put into dividend-paying stocks—and continually reinvested—would have returned $413,600, notes S&P's Howard Silverblatt.

On top of this, companies are likely to ratchet up their payouts this year, continuing a trend from 2011. Corporate cash levels are near all-time highs, after all, and as BofA Merrill Lynch points out, the S&P 500's current payout ratio is hovering at all-time lows.

Montreal-based brokerage Brockhouse Cooper expects that partly for this reason, the S&P 500's dividend yield over the next few years will rebound to 2.7% from its current 2.2%. While still low by historical standards, that handily tops the yield on 10-year U.S. Treasurys, which is less than 2%.

Still, investors should go after the right kind of dividend. Fat yields can be a sign of heightened risk. . . . That is why Gluskin Sheff economist David Rosenberg emphasizes SIRP, or, safety and income at a reasonable price. Better SIRP than sorry, one might say."

The SIRP approach makes sense to me. The message--buy strong companies which grow earnings and increase dividend payments over time. Boring perhaps but effective.

Today ten year treasury bonds yield ~2%. Ten years from now the yield on those bonds will be considerably higher. Thus, the best we can do is 2% annually over the ten year time period, and we'll do much less than that if we sell the bond during that time.

However, if we buy shares of a blue chip 3%-4% dividend yielding stock such as Pfizer, Intel, GE, Coke, JP Morgan, Home Depot or countless others, our portfolio's value will most likely appreciate substantially in those ten years, and from inception we'll probably be receiving a double in cash dividend payments as well.

It's simply the magic of the rule of 72 and compounding over time.

As recounted in the above referenced article, $10,000 invested in dividend paying stocks in 1979 would have grown to more than $400,000 in 2010, assuming that the dividends had been reinvested continuously.

Going from 1 to 40 in 31 years is not all bad. As a matter of fact, going from 1 to "only" 20 wouldn't be the worst thing to have happen either.

Thanks. Bob.