Today's historic low interest rate environment suggests that bank deposits are going to hurt savers for years to come. With savings accounts barely paying any interest, savings accounts lose money after accounting for inflationary effects on things like gas, food and electricity. Even a 2% interest rate on a CD won't cut it. Corporate dividends, on the other hand, are paying attractive rates of return and even more are boosting those payouts to shareholders.
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Under Promise and Over Deliver
Over time, corporate dividends do a good job of creating income for investors. And over time, the highest quality dividend-paying stocks increase in value, providing an additional increase in capital.
In the short run, fluctuating stock prices can be painful, but the value of dividends is receiving them over many years.
Lest you think dividends aren't meaningful, consider the following fact: From March 15, 1990 through Jan. 31, 2012, the S&P 500 was flat; factor in dividends, the S&P 500 gained 26.2% over that same period. The same was true in 2011: with dividends counted, the S&P 500 was up 2.1% versus a flat return without them. (For related reading, see Worst S&P 500 Stocks Of 2011.)
Dividend payouts are made from cash, not earnings. They are real and cannot be manipulated. So it stands to reason that companies boosting dividend payouts today are confident about the companies' ability to generate cash going forward. Indeed pharmaceutical giant Abbott Labs (NYSE:ABT) recently boosted its dividend for the 40th consecutive year, by 6%. The company now yields 3.4%.
Fidelity National Information Services (NYSE:FIS) is the world's larger provider of banking and payment technologies. Since 2003, FIS has been paying a quarterly dividend of 5 cents a share, or 20 cents per year. Last week, the company decided to reward investors by quadrupling the dividend to 80 cents a year. Fidelity's yield is now 2.6% and shares trade for 20 times earnings; reasonable for a market-leading company.
Buckeye Partners (NYSE:BPL) is an energy partnership that owns petroleum pipelines in the U.S. Buckeye has been a huge income producer for its owners as the company has increased its payout for 16 consecutive years. The current increase boosts the dividend payout to over 7%.
Cable giant Comcast (NYSE:CMCSA) also gave investors a gift last week, after it reported strong operating results and decided to add another $420 million to its dividend payout. Comcast is the top U.S. cable operator. After a solid financial performance, Comcast boosted its payout by 44%. As an added bonus, Comcast agreed to buy back $6.5 billion worth of shares, with $3 billion in 2012. So not only is the company paying more out to investors, but the company is also retiring shares.
The Bottom Line
The key to dividends is time. Over time, dividends come to represent over half of the overall market return. During the past decade, dividends accounted for 100% of the market's overall return. Going forward, collecting dividends is likely going to have a magnificent effect on portfolio returns.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.