Slagle my buddy pete weis over on the pkarchive board - he also just recently started his world tour and shades about to start one too - what up with all these folks with their recent wanderlust? hehe
Anyways here more on those dividend companies you turn me onto - he agree with you.
nytimes.com
As Earnings Slow, Dividends Pick Up the Slack
By PAUL J. LIM
FOR the past two years, the stock market's run has been fueled by a surprisingly strong surge in corporate profits.
Unfortunately, the gas tank is starting to empty. After reaching rates of more than 20 percent starting in late 2003, profit growth is slowing. In fact, second-quarter earnings for companies in the Standard & Poor's 500-stock index are expected to grow by a much more modest 7 percent, according to Thomson Financial.
Yet that doesn't mean that the case for owning stocks is weakening. At the moment, there is another very positive sign for the stock market: a surge in dividends. Just as corporate profit growth is slowing, dividends paid by S.& P. 500 companies are accelerating.
Ever since the dot-com bubble burst in 2000, dividend-paying stocks have commanded attention from investors, especially when the federal government cut taxes on qualified corporate dividends in 2003 to 15 percent from as high as 38.6 percent. But it was only at the end of 2003 that dividend growth started picking up speed. And it was only this year that dividends started growing faster than profits.
In the first three months of the year, corporate earnings grew by less than 14 percent while dividends increased by almost 16 percent. In the second quarter, dividends jumped by nearly 13 percent, or almost double the estimated rate of profit growth.
Dividends typically have grown faster than earnings only in economic downturns, like the one in 2001. During such periods, it's typically not a case of dividends accelerating but rather of earnings slowing faster than dividends, said Jeffrey N. Kleintop, chief investment strategist for PNC Advisors in Philadelphia.
'The fact that this is happening midway into a business cycle is really something,' he said.
What does it mean? Because dividends compensate investors while they wait for equity prices to appreciate, investors are being paid more to hold stocks, and more of us should be willing to do so.
To be sure, the dividend yield on the S.& P. 500 is still slightly below 2 percent, according to Standard & Poor's. But these aren't the roaring 1990's. Stocks aren't posting 20-percent-plus returns. So that means dividends are playing relatively larger roles. Over the last 12 months, for example, the S.& P. 500 has returned around 9 percent - and one-fifth of that return has come from dividends.
The argument for paying attention to dividends right now goes beyond yield. 'Focusing on absolute yields is not a very good approach when it comes to dividends,' said Howard Silverblatt, equity market analyst at S.& P. Because dividend yields are calculated by dividing a stock's cash dividend per share by the share price, a high dividend yield could just be a sign of a company whose stock has taken a beating. But dividend growth measures the increase in the actual cash payout. This is why growing dividends are often seen as a sign of improving finances, as companies need to generate enough cash flow to return larger checks to shareholders.
At the end of the day, it is the compounding effect of these growing dividends, reinvested methodically in one's portfolio, that helps engineer big returns, Mr. Silverblatt said.
For example, from 1995 to 2004 - a period generally marked by a declining focus on dividends - the S.& P. 500 rose 164 percent, based on price appreciation. But by reinvesting small but growing dividends, investors earned 212 percent in total returns.
Eugene C. Sit, chairman of Sit Investment Associates in Minneapolis, says he thinks dividends in the S.& P. 500 could grow 10 percent to 12 percent annually for the next several years, which should make dividend payers more attractive.
The fact that government bonds are yielding such paltry sums makes dividend growers even more appealing, he says. 'If you're buying a bond at a 4 percent yield and you're in the highest marginal tax bracket, after taxes you're earning something close to 3 percent,' said Mr. Sit, lead manager of the Sit Dividend Growth fund.
Yet an investor could earn similar or even higher yields through dividend-paying stocks, and those payouts are likely to grow significantly. Moreover, dividend investors are being taxed at a maximum rate of just 15 percent - at least through 2008, when the current dividend tax law will expire unless Congress extends it.
Where are dividends growing the fastest? Oddly enough, in the technology sector, which until recently has hardly been synonymous with dividends. Tech dividends have grown 44 percent annually over the last two years as more companies that hadn't previously returned profits to shareholders started doing so.
Of course, tech dividends are growing fast because they are starting from a very small base. Other sectors showing strong dividend growth of late have been telecommunications, financial services, consumer staples and consumer discretionary stocks.
Daniel Clifton, executive director of the American Shareholders Association - an affiliate of Americans for Tax Reform that is pushing to make permanent the dividend tax cuts - says investors need to put things in perspective.
Dividends may be growing faster than earnings because 'so many companies started withdrawing dividends in the 1990's to pursue growth,' he said. Many of those companies took cash that could have been paid out in dividends and reinvested it into the company to expand or even to acquire other businesses.
As a handful of S.& P. 500 companies have begun to reinstate dividends, the growth rate has shot higher. Since the end of 2002, some 33 additional companies in the S.& P. 500 have started issuing dividends, bringing the total to 384. That is still a far cry from the 469 companies that did so in 1980, but the trend is clear and investors are already picking up on it. So far this year, dividend-paying stocks in the S.& P. index have returned 2.9 percent, on average, while those that don't pay dividends have lost 1.5 percent, according to S.& P.
MOREOVER, since stocks hit their recent lows in April - amid fears of shrinking profits in the face of rising oil prices and interest rates - the fastest-growing sectors in terms of dividends have performed the best, Mr. Kleintop said. Those include technology, financial services, industrial, consumer staples and consumer discretionary stocks.
But the absolute rate of growth is often less important than the sustainability of growth. Standard & Poor's puts together a list of companies that have managed to raise their dividends every year for the past quarter-century. From 1990 to 2004, these so-called dividend aristocrats returned 13.4 percent a year, on average. That's 2.5 percentage points better than the overall S.& P. 500.
The good news for dividend-growth investors is that there is plenty of room for this trend to grow. Despite the recent pickup in dividend growth, the actual payout ratio - the percentage of a company's profits paid in dividends - is still near historical lows.
That is one reason Mr. Kleintop says he believes that 'over the next 10, maybe 20 years, we could be in an environment where people are much more focused on dividends than they were in the 1980's and 90's.' |
