With the Fed still deciding whether or not to slow its quantitative easing problems, investors have been at odds about what to do. If bond’s yields rise as many analysts expect them to do, “risk-free” returns begin to look pretty good. That’s sent the prices of many income-oriented asset classes downwards over the last few months. That includes standard dividend paying equities and funds like the SPDR S&P Dividend (NYSE:SDY).

However, investors may not want to give up on their dividend stocks just yet. These quarterly pay-outs can provide plenty for benefits for investors and are an important part of a portfolio’s total returns. Even more so, dividends continue to look good when compared to bond yields.

A Focus on Payouts

Given the potential for an early 2014 taper of the Fed’s bond buying program, investors may not want to throw away their dividend stocks just yet. That’s because, these pay-outs have been some of the key elements to total stock market returns.

According to data provided by Morningstar (NASDAQ:MORN), the benchmark S&P 500 index has averaged a total return of 9.7% annually over the past 40 years. That’s certainly an impressive overall long term return. However, the kicker for that has been dividends paid by the indexes constituents. Over the last 40 years, dividends have made up around one-third of the total return of large U.S. stocks. Removing those payments pushes the S&P 500’s return down to just 6.4% per year. Expanding that out further- to 1926- 45% of the S&P’s total return came from dividends. 

That difference in annual returns amounts to some serious coin- to the tune of about $280,000 more with dividends over the 40 years. Overall, a $10,000 investment grows to well over $400,000 with a total return of 9.7% annually. That same investment is worth around $120,000 if we remove the contribution of dividends from the equation. 

While that difference in account value should be enough to make you focus more attention to dividends, there are other reasons to like pay-outs from stocks. Dividend payments can help smooth out returns. These payments can help cushion portfolios in falling markets and help reduce risk. Reinvesting those payments can help enhance returns when the market rights itself once again. Meanwhile, dividends can help keep inflation at bay. Many firms will increase dividends at much faster rates than inflationary numbers. This provides investors a higher yield-on-cost, more income and higher overall returns.

Keeping The Dividend Focus

Given the importance that dividend stocks can have on total returns, investors may want up their exposure to the asset class. A prime way could be through the iShares Select Dividend ETF (NYSE:DVY).

The $13 billion behemoth tracks 101 different dividend paying U.S. stocks- including cigarette maker Lorillard (NYSE:LO) and paint/coatings producer PPG Industries (NYSE:PPG). So far, DVY has done pretty well in the total return department. Over the last 5 years, the ETF has racked up 8.51% annual total returns. Expenses run a cheap 0.39% and DVY yields 3.39%. Likewise, the WisdomTree LargeCap Dividend (NYSE:DLN) can be used as a broad play as well.  

While most income investors flock to boring utilities or consumer staples firms when looking for equity income, they may want to focus their attention on the high-tech world. The technology sector is quickly becoming a leading dividend machine. Old Tech Titans like Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO) are flush with cash. More importantly, those firms are retuning that cash to investors via rising dividend payments. According to new agency Bloomberg, technology firms have accounted for more than 54% of the dividend growth of the last five years. 

Seeking to capture that growth is the year old First Trust NASDAQ Technology Dividend (NASDAQ:TDIV). The fund includes mid to large cap tech stocks that have paid a regular or common dividend within the past 12 months that yielded at least 0.5%. While that may seem low at first blush, most of its holdings have much larger payouts. TDIV currently yields 2.59% and has managed to outperform many non-dividend focused tech indexes- like the Technology Select Sector SPDR (NYSE:XLK) -by a wide margin. 

The Bottom Line

For those investors looking at the long term, ignore the taper talk and focus on dividends. The pay-outs from equities have been some of the leading contributors to total returns and can have powerful effects on a portfolio. The preceding ideas make ideal selections.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

 

Related Articles
  1. Fundamental Analysis

    Yield Investing: Dividend, Earnings And FCF

    There are numerous ways to value investments, and many investors prefer a specific valuation method. Yield investing is one way to value a stock by comparing the current price to various factors. ...
  2. Fundamental Analysis

    Lessons On Corporate Dividend Payout And Retention Ratio

    Why are dividend payout and retention ratios important to consider when investing in company stock? What companies have high ratios?What constitutes a high dividend payout and retention ratio? ...
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  8. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Record Date

    The cut-off date established by a company in order to determine ...
  6. Dividend

    A distribution of a portion of a company's earnings, decided ...
RELATED FAQS
  1. Do penny stocks pay dividends?

    Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. When does the holding period on a stock dividend start?

    The holding period on a stock dividend typically begins the day after it is purchased. Understanding the holding period is ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!