Dividend Increases Spur New Interest
By Jonathan Cheng
15 November, 2010
The Wall Street Journal
The spotlight is again on dividends after Intel raised its payout last week and the Federal Reserve said it might soon allow banks to increase their payments.
While U.S. investors have long been reluctant to embrace dividend stocks, there are some signs they are paying more attention.
Intel shares jumped 1.5% Friday after the company announced a 14% increase in its dividend. And bank stocks rose almost 6% in the two days after The Wall Street Journal reported this month that the Fed may loosen its rules to allow banks to increase their dividends. Federal Reserve Governor Daniel Tarullo said Friday that approvals for some banks may be issued in the first quarter of next year.
In the first part of the rally from the March 2009 lows, stocks of non-dividend-paying companies far outpaced stocks of those that do pay dividends. But, as interest rates have reached new lows and the economy has remained sluggish, dividend-paying companies have been catching up. The 372 dividend-paying S&P 500 stocks have a total return of 12.5%, including dividends, since the end of June, based on an equal-weighting analysis by Birinyi Associates, compared with the 12.9% gain seen by the 128 companies in the index that don't pay dividends.
The reasons supporting investing in dividend-paying stocks are many: The Standard & Poor's 500-stock index is chock-full of companies sporting yields higher than that of the 10-year Treasury note. Companies also are sitting on record amounts of cash, and their payout ratios, at 28.6%, are near historic lows.
But U.S. investors tend to shun dividend stocks, mainly because they look to stocks for growth, not for conservative income streams -- they buy bonds for that. And they are all too aware of the downside of stock investing.
Those who are buying are doing so cautiously. Jim Eidson, a 70-year-old retired salesman in the Philadelphia suburbs, is a reluctant dividend investor. He says he has been persuaded by his money manager to increase his exposure to dividend stocks, a move he says makes sense as he and his wife seek steady streams of income. But, so far, he has only dipped his toes in the water. "I'm realizing that maybe spectacular growth is not going to happen again. Then I think dividends are more important," Mr. Eidson says. But he says growth is ultimately the main draw of stocks: "The dividend is nice, but it's not the primary reason that I look at stocks."
Donald Taylor, manager of Franklin Templeton Investments' Franklin Rising Dividends Fund, says his fund is showing net inflows at a time when investors are generally fleeing U.S. equity markets. He wouldn't be specific.
WisdomTree, a maker of exchange-traded funds, says its U.S. dividend funds have taken in $356 million in net inflows this year. Its main U.S. dividend fund, which excludes financial stocks, has chalked up gains of about 18% since the end of June.
Still, Bob Froehlich, senior managing director at Hartford Financial Services, who has long advocated dividend investing, says he had expected far more investor interest in dividends by now. "They're still putting money into bonds. Everyone knows what the right thing to do is, but they're not doing it," Mr. Froehlich says. "There's this perception that there's never any risk in bonds."
Mr. Froehlich says many investors feel so burned by corporate America -- having endured the bursting of the tech bubble, the scandals of Enron and WorldCom, then the financial crisis and May's "flash crash" -- that even blue-chip, dividend-paying stocks may seem too risky. Banks, for example, were once sought for their dividends. But the financial crisis brought on dual pain for investors: lenders' stocks nose-dived and they cut their dividends.
Even if bonds endure a major correction, less than half of investors will put their money into stocks, Mr. Froehlich predicts. Many will just keep their money in bonds in the hopes of recouping it when the debt matures.
What some investors may not take into account, says Howard Silverblatt, senior index analyst at S&P, is that dividends can mean the difference between losing money in the stock market and keeping it. Since 2000, the S&P 500 has lost about 18%. But once dividend returns are factored in, that loss is erased, Mr. Silverblatt says.
And at least one class of dividend stocks is doing well: the S&P 500 Dividend Aristocrats index, the handful of S&P 500 companies that have increased their dividends for at least 25 consecutive years. These 46 stocks, which include Exxon, McDonald's, Procter & Gamble and Wal-Mart Stores, have outperformed the S&P 500 this year, as well as the S&P 500's "growth" and "value" indexes, with total returns of 13.8%, or 10.9% in just stock-price gains.
Many say it is hard to predict what it may take to lure more investors into dividend stocks. The Fed's decision to flood the financial system with money has complicated some investing strategies. The Fed is seeking to drive investors out of bonds and into riskier assets like stocks. But some say investors may simply continue their recent pattern, staying in the bond market or going for high-growth stocks.
The uncertainty about how dividends will be taxed after this year has also made some investors hesitant. Jeremy Schwartz, WisdomTree's research director, forecasts dividends will increase on average by 8% this year.
Companies are paying out just 28.6% of their profits right now, well below their 50-year average of 47%, according to Strategas.
John Lynch, chief equity strategist at Wells Fargo Funds Management, says he is taking a closer look at dividends.
" I thought dividends were cute, like, 'Sure, I'll take 2% on top of my 20% returns,'" Mr. Lynch says. But, he said, in a slow-growth environment of superlow interest rates, "it's back to the down-home values of fundamentals." |
