So when I heard recently that some advisers were using dividend-paying stocks to coax people who still hold their money in cash or low-yielding bonds back into the equity markets, my ears perked up.
After all, dividend-paying stocks were largely ignored in the high-growth years for much of the past two decades. Companies that pay dividends, like Coca-Cola, McDonald’s, Caterpillar and Johnson Johnson, are established corporations with none of the go-go appeal of a technology start-up.
On the other hand, the people running those start-ups often had (and still do have) a good portion of their compensation tied up in stock options. And those options become more attractive the higher the stock price goes, making growth much more important than returning any capital to investors through dividends.
And until President George W. Bush’s tax changes in 2003, dividends were taxed at ordinary income tax rates, not the lower capital gains rate.
“The way the tax code was written, it made companies go for capital gains over dividends,” said Jason Trennert, managing director at Strategas Research Partners. “It made people make imprudent decisions. Dividends remind executives four times a year that it’s not their company.”
Mr. Trennert said that many clients of Strategas, which has headquarters in New York, are reporting increased interest in dividend-paying stocks. That could produce a chicken and egg situation of companies increasing or initiating dividends if investors are asking for them. The advisers and analysts I spoke to who favored dividend-paying stocks as a crucial part of anyone’s portfolio were divided into two camps.
The first offered more sentimental reasons. Kenneth Kamen, president of Mercadien Asset Management in Hamilton, N.J., said he had a relative in his 80s who has held a handful of dividend-paying stocks since the 1970s. Until recently, he reinvested the dividends to buy more shares. But with the stocks now worth more than $1 million and with the average dividend yield of 4.5 percent, the relative stopped reinvesting the dividends and now receives $61,000 a year in income.
Mr. Kamen said his relative’s rationale back in the 1970s is still sound: if the company paid a dividend, it was probably sound. “He said, ‘We didn’t have access to all this information,’ ” Mr. Kamen said. “Dividend-paying stocks represented an interesting form of research for him. You can’t fake cash.”
The second group considers these stocks to be a counterweight to portfolios excessively weighted toward supersafe investments, since the performance of those investments is going to lag over time.
Catherine Avery, who runs an investment advisory company under her name in New Canaan, Conn., said she is telling her clients that 54 percent of the returns in stocks since 1928 have come from dividends. Ms. Avery also notes that companies like Johnson Johnson and Emerson Electric have maintained unbroken streaks of increasing their dividends — 49 years in the case of Johnson Johnson and 53 years for Emerson.
She said she has been making these points to encourage clients who have resisted investing in equities since the recession to buy stocks again. “They missed two big years in the markets,” she said. “Now we’re reaching out to people and telling them this is your dead last chance to get back into the market at attractive valuations.”
The reality, though, is most people own dividend-paying stocks even if they don’t think of them in those terms. At the end of 2010, 373 companies in the Standard Poor’s 500-stock index paid dividends. That is nearly 75 percent of the companies in the index that most investors track.
What follows is a more detailed assessment of the pros and cons of owning dividend-paying stocks.
THE UPSIDES All things being equal, dividend-paying stocks have several advantages.
Article source: http://feeds.nytimes.com/click.phdo?i=b4569ed1fead942c24196ce4cae30a7c
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