In this low interest rate environment, dividends have been especially valuable to investors. Specifically, the value has come from the consistency of the dividend and as a bonus, an increase in the dividend. A company increasing its dividend is a high quality sign that business remains strong or is showing signs of improvement. Both signals usually have a positive effect on the company's underlying stock price.
The Second Coming of Financials
While many investors continue to have doubts on financial stocks, investors should focus instead on the actions taken by the company. Earlier this week, Goldman Sachs (NYSE:GS) announced that profits fell by over 20% in the first quarter, as the company continues to contend with weak demand for deal making. Nonetheless, the company boosted its dividend by nearly 30%. Granted, Goldman's dividend is still below what it was before the financial crisis, but the company giving more back to shareholders is a good sign. Even if earnings growth remains sluggish, Goldman is giving excess cash back to shareholders as opposed to investing that cash into unprofitable projects or growth. JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) continue to boost their dividends and as the financial industry slowly improves, dividend payouts will likely enjoy a second coming of sorts.
Big Payouts Getting Bigger
Oil and gas master limited partnerships (MLPs) have typically boasted big yields because they are required to pay out all available cash flows to shareholders as distributions. Plains All American Pipeline (NYSE:PAA), a Texas-based oil and gas partnership recently boosted its payout for the 30th time in 32 periods. Shares now yield 5.3% and currently trade near a high for the year as solid cash flows and a greater payout has kept investors demanding shares. An even bigger payout is available from Linn Energy (Nasdaq:LINE), a high quality MLP that has maintained is payout without interruption throughout the recession. More so, Linn has increased its payout so investors not only have benefited from a rising stock price, but a greater income stream.
The Bottom Line
Over time, dividends come to represent a greater proportion of the value created from investing in equities. Companies with a history of paying dividends tend to increase those payouts over time and value creating effect is magnified even further. Over time, dividends increase while your cost basis remains the same which can make your actual yield astronomically high.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.