Dividends create enormous value especially over an extended period of time. In fact, nearly a third of the "markets" historical return of 8% to 9% per year over the past 70 years or so is due to dividends. So the value of dividends should not be discounted. However, a dividend is only as valuable as its next payment date. If a company is unable to make regular dividend payments, then the value of that dividend should carry little weight.
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AstraZeneca (NYSE:AZN) is a major pharmaceutical firm that develops drugs for cardiovascular, gastrointestinal and oncology illnesses. Shares trade at $49 and analyst estimate that AZN will earn $7.17 a share in 2011. The dividend payout is $3.70 a share for a yield of 7.5%. That's significantly more than the 4% dividend yield of pharma giant Pfizer (NYSE:PFE). AstraZeneca has a solid balance sheet with $11 billion in cash and $9.5 billion in long term debt.
Telecommunications giant Vodafone (NYSE:VOD) trades for $26 a share and pays a dividend of $1.92 or a yield of 7.30%. Vodafone has a strong presence in all the high growth emerging markets including Africa where cell phone penetration rates are still relatively low in relation to the rest of the world. Vodafone is estimated to earn $2.66 a share at the end of its current fiscal year for a valuation of less than 10 times forward earnings.
Dividends and Growth
Great dividends do not have to only come from large fully established enterprises. United Online (Nasdaq:UNTD) is an online retailer of consumer goods such as flowers, cosmetics and gourmet food. Shares trade for $6 a share or 10.6 times earnings. The dividend payout is 40 cents or 6.5%. The company is expected to earn 87 cents a share this year. As a smaller company, UNTD doesn't have a long history of dividend payments. Also, the dividend payout has been reduced twice over the past six years. And as a retailer of discretionary items, UNTD will have to continue diversifying its product line to ensure future growth. But with consumers spending more time online, UNTD could offer a decent yield and growth play.
A dividend payout can be an essential component of value creation in a business. Stability and longevity of a dividend are good indicators that the company is focused on returning cash to shareholders. However, one must also consider the company valuation before investing merely for dividends. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. See How To Pick A Stock.)
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