Dividend Stocks Still Matter

By Aaron Levitt | October 24, 2013 AAA

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.

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