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MAKING CENTS OUT OF THE NEWS
Blog #18
(May 13th, 2010)
HIDING IN DIVIDEND-PAYING STOCKS
By Tom McAllister, CFP®
Like a dozen or so opinions about investing in stock? Just ask a dozen or so different people. But, if you're asking me, dividend-paying stocks may well be today's best option for investors looking for income.
Some common myths surround dividend yield from equities:
Dividends are a waste of money; companies should be using the money to reinvest in their growth.
In fact, while one might think companies that don't pay dividends might fare better than those that do, the opposite is often the case. It seems corporations that pay out a chunk of their earnings to shareholders act more judiciously in spending what's left.
Dividends provide only modest yields today.
True, but alternatives such as money market funds and high-yield corporate bonds that worked well in 2008 and 2009 aren't working now. Money market funds yield almost nothing, and buying long-term bonds in the current economy is too risky given the potential for much higher inflation.
Stocks lose to bonds in the long run.
Some observers point out that the market did not go up at all between 1966 and 1981. Yet with dividends considered, stocks yielded 6% annually over that fifteen-year period, as dividend payouts produced steadily rising yields on investment. By 2009, with share prices of S & P 500 stocks down 25%, current yields on the original investment going back to 1966 was 24%!
Dividend-paying stocks are hard to find these days.
I remind you that investors may look overseas, where dividends are more common, to find the best yield on growth stocks. In the U.S., we have a relatively poor "dividend culture"; we tend to think of the market as a capital vehicle rather than looking to total return. One can turn a 2% yield into a 4% yield just by going to Australia. I find global dividend-paying stocks to be under-appreciated, to say the least.
The stock market is too volatile for the average investor, as demonstrated by last week's chaos.
$16,000,000 is sixteen million dollars; $16,000,000,000 is sixteen billion dollars. Somehow, last week,the two numbers were confused in a futures trade of Proctor and Gamble stock. An investigation is underway to determine exactly what happened. Interesting to note that, some twenty months since the "great meltdown" of 2008-09, Congress has yet to pass ANY legislation addressing the causes of the crisis, to my mind a completely inexcusable lapse.
Stocks had rallied from February into April of this year; the market had, I think, gotten a bit ahead of itself. Ironically, I was preparing to write a blog on the likelihood of a 5-10% "healthy" pullback, hardly expecting one of such magnitude!
Such volatility is unsettling to investors and uncomfortable for professionals as well. In my opinion, though, based on the 4% rally in the market on Monday, things have stabilized, and the stock market should rally into the summer.
I currently recommend quality dividend-paying common (or preferred) stock, both foreign and domestic, for those looking to maintain their current income at satisfactory levels.
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