The following deals with the idea of long-term dividend-growth is excerpted from a recent article (June 19/02) in Standard & Poor's weekly newsletter, The Outlook. I hope it adds something to the discussion on dividend-growth and demonstrates the great potential for increasing dividend returns over time. Such growth results from a combination of growth with the payment of steadily rising dividends, and can lead to huge returns: "Stocks that pay dividends provide an additional advantage in weak markets: They tend to maintain value better than non-payers. For 2002 (through June 12), the 351 stocks in the S&P 500 that pay dividends are up an average of 1.65% o an unweighted basis. In contrast, the 149 non-payers are down an average of 17.6%. This list includes stocks that are worth buying for the prospect of increased future income. Each of these issues has a quality ranking of A+, indicating a superior 10-year track record of earnings and dividend growth and stability. In fact, each company has boosted its dividend annually over the last decade. For a Buy & Hold investor, the cash returns on most of these stocks have been impressive. Since stocks always fluctuate, assume they were purchased at the median price---adjusted for splits--- in 1991. The figures following the name of the company shows the yield on cost, which represents the current annual dividend as a yield on the 1991 median stock price. This is a valid exercise for long-term investors, since the dividend has increased, but the cost of the stock position has not. In several cases, the yield on cost is in double digits." American International (AIG)2.1% Automatic Data Processing (ADP)5.2 Avery Dennison(AVY) 11.8 Arthur J Gallagher (AJG) 10.1 Interpublic Group (IPG) 5. *Johnson & Johnson (JNJ) 7.2 MBNA(KRB) 19.1 Paychex (PAYX) 45.6 Pfizer (PFE) 10.2 Pitney Bowes (PBI) 9.1 T Rowe Price (TROW) 15.9 SouthTrust Corm (SOTR) 17.1 Wal-Mart Stores (WMT) 2.7 Wilmington Trust (WL) 8.7 Of course capital gains are nice too, but capital gains can dissipate quickly in a market decline. Companies can and do sometimes stop paying dividends if they are in serious trouble, but most consistent long-term dividend-payers are very hesitant to do so. You can lose 50% or more of capital gains overnight. These gains may have taken years to accumulate, but they can be gone in a few months. Dividends, however, once paid are yours. You don't have to sell the stock to get them triggering capital gains taxes in the process. You may agree that some of the above returns would help you feel better about entering turbulent times in the stockmarket, but it is important to keep in mind that even these returns are not static. They are still growing. Most consistent, long-term dividend payers continue to raise these dividends annually.
jammerh writes,You can lose 50% or more of capital gains overnight. These gains may have taken years to accumulate, but they can be gone in a few months. Dividends, however, once paid are yours. You don't have to sell the stock to get them triggering capital gains taxes in the process. That's true, but on the other hand, if I get $1,000 in dividend income, it's taxed as ordinary income (max=38.6%). If I have $1,000 in capital gains, it's only taxed at 20% or less.intercst
intercst says:"$1,000 in dividend income, it's taxed as ordinary income (max=38.6%). If I have $1,000 in capital gains, it's only taxed at 20% or less.Most of us underestimate the power of dividends to compound over time in in growing companies. Historically, more than 50% of returns from investing in stocks come in the form of dividends. As the S&P report indicates, dividend returns can become huge over longer holding periods because unlike interest on CD's or bonds, yields from some of the best dividend-paying stocks keep getting increased year, after year.Even if dividend income is taxed at a higher rate, yields like these are at some point going to be well worthwhile to those with the patience to let them grow. Little good it'll do you if the capital gains you've patiently built up over the years get wisked away from you in a market meltdown. Dividends are money in your hand. Eventually, through growth and consistent dividend increases your yield will more than make up for any taxes compared to any capital gains.Anyone interested in the dividend-growth approach might want to read:"Dividends Don't Lie", or, "The Dividend Connection by Geralding Weiss", or a later book by the editors of the S&P Outlook, entitled, The Dividend Rich Investor".Or read TMF Selena's recent post on the topic. (when you enter a word for a search in the searchbox click on "Fool Articles" instead of "Discussion Boards"). TMF Matt Richey has also written recently on the subject of dividends.
Jammerh You wrote:"Even if dividend income is taxed at a higher rate, yields like these are at some point going to be well worthwhile to those with the patience to let them grow. Little good it'll do you if the capital gains you've patiently built up over the years get wisked away from you in a market meltdown. Dividends are money in your hand. Eventually, through growth and consistent dividend increases your yield will more than make up for any taxes compared to any capital gains.This is a good point but one thing you forgot to mention in defense of your position is that once you cash in your capital gain, you dont have it any more. The dividend will be paid year after year assuming no cuts and/or elimination. But if a dividend cut happened it is not likely you would have any capital gain left as most dividend paying stocks have to be hammered before they cut the dividend, see Xerox, ATT, and many of the Utes these days - none of them cut the dividend until the stocks were crushed beyond recognition.I have 30 years or more this retirement and my approach is to try and build up my position in companies that pay dividends and grow the dividend over time. I reinvest the dividends and am willing to pay the tax on these dividends while I am working. Hopefully if they continue to raise the dividend over time I will not have to sell stocks every year to live off in retirement.Andy
Author: jammerh Date: 8/8/02 11:23 AM Number: 34949 You can lose 50% or more of capital gains overnight. These gains may have taken years to accumulate, but they can begone in a few months. Dividends, however, once paid are yours. You don't have to sell the stock to get them triggeringcapital gains taxes in the process.Boy, how investor sentiment has changed!! If you had written this two years ago, your keyboard would have probably exploded before you had a chance to push the 'Enter' button!!Seriously, I actually wrote something along these same lines a couple of years ago, and it drew so many negative posts that I finally gave up trying to explain my position.But, I have never given up on dividend paying stocks, and I am glad I didn't. Their performance during this bear has been much better than the non-dividend paying ones.RK
RK, well I do<//b> still get a lot of flack on preaching the Gospel of Dividends on other boards. Maybe you just wore them out here.jammerh
Andy, good point, but if you cash in your investment you don't have your dividend anymore either. I think you and I agree though on most of this. The hard job is convincing others to see how dramatically dividend return can grow over the years in a company paying even a modest dividend. I think many investors miss this because a 2% current dividend yield sounds low, but if you've held that stock for 10 years or more you have to adjust the yield for any splits, and this will give you a much better picture of how much you are making on the cost of the original investment. Sometimes the yields are huge.
I am fairly new to investing, and have cautiously started by DRiPing a few stocks. I, as a DRiPer, of course like dividends very much, but if I am reinvesting them into more stock, and the market tanks, won't the value of my dividends be the same as my stock? Or, even less, because I had to pay taxes on the dividends, right? Anyone care to check my thinking on this? Or, do you guys think that it would be better to receive the dividends as cash, and just keep adding to the position every month in the form of OCP's?Mike in NJ
Mike, I'm not sure what your asking exactly. I might help if you rephrased the question. Also, if you don't get a satisfactory response you might want to try posing the question on the Ask A Foolish Question Board. There are a lot of hard-working posters over there who spend their time answering sincere questions.The problem I have with your question is the part that asks "...won't the value of my dividends be the same as my stock?"It isn't clear here if you're speaking about the dividends you've already received, or the dividend rate you are getting. If you're talking about the first of course, if you're reinvesting your dividends in more stock, then the value of those stocks goes down with the shareprice. Conversely, if the value of the stock goes up, the dividends which are turned into additional shares, will enhance your returns. This is part of the risk of reinvesting the dividends---part of the risk and part of the reward. You do it if you want more of the stock you own. The dividend rate shouldn't change, but it may if the company has severe problems and needs the cash.When we talk about dividends being money you received, we're talking about dividends received as cash. Cash has certain advantages. You don't have to spend it on additional stock. If you do you can choose which stock you put it into.Yes, you pay taxes on dividends income if you are in a taxable income bracket.
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