Friday, April 27, 2012

For Every Season There is A Season

Dividend-paying stocks were the rage last year.

With bond yields plunging to 60-year lows, and the Fed signaling that it would keep short term borrowing rates at essentially 0% until at least the end of 2014, yield-hungry investors headed for stock market in search of income.

And so, in 2011, investing in stocks that paid the highest dividend yields was a "home run".  According to Merrill Lynch, high dividend paying stocks produced a total return of +18.5% last year, which included a price return of +12.6%.

Problem was, as so often happens, good ideas in the stock market are taken to extremes, and investors adjust.

The first quarter of 2012 was a miserable one for dividend-paying stocks.

While the S&P 500 was roaring ahead by nearly +13%, dividend-payers were punk performers, up a minor +3% total return for the quarter (again based on Merrill Lynch numbers).

So should you abandon the idea of investing in stocks that pay high dividends?

I don't think so, and neither does the Lex Column in today's Financial Times (the added emphasis is mine):

Yesterday, PepsiCo, ExxonMobil, Dow Chemical, Colgate-Palmolive and Kellogg all reported.  A mixed bag to be sure. But they share more than just being household names.

One thing that binds these companies together - as well as distinquishing them from the latest upstarts - is an obvious commitment to dividends.  Exxon increased its distribution by 7 per cent against 2011 and Dow said it would lift its dividend 28 per cent in the second quarter.  Even struggling Kellogg gave shareholders 3 cents more than last year. Colgate's payout ratio is 10 percentage points higher than it was a decade ago.  Theory says that dividends do not matter.  But the total return of each stock has either matched or trounced the S&P 500 index over the past 10 years.

http://www.ft.com/home/us

Well put.