One of the benefits of investing in certain stocks are the dividend payments received by shareholders. Dividends are the portion of a company’s profit that the board of directors has authorized to be paid to us, as owners of the company. The remaining profits are generally reinvested in the company’s operations for future growth
We have 3 learning objectives for this post:
- To understand the different categories of dividend paying companies
- Review the historical performance and risk of the different dividend classifications
- Grasp the advantage that rising dividend companies have historically provided
Some companies don’t pay dividends at all. Does this make them a “bad company” to invest in? Not necessarily. A lot of very successful companies have never paid a dividend, and may never do so. Their share price may still do very well over time. Often, younger companies that are still reinvesting profits back into the expanding business don’t pay dividends because there isn’t any profit left over to do so.
We classify companies into four categories.
Dividend Payers – Companies that pay a regular dividend and may increase it at a moderate pace over time
Non-Dividend Payers – Companies which have never paid a dividend
Dividend Cutters - Those firms which have reduced or eliminated their dividend payment
Rising Dividend Payers - These companies not only pay a dividend but increase it regularly and at a faster than average pace
Historical research shows that, as a group, dividend paying stocks provide better long-term performance than non-dividend paying stocks or dividend cutters. If you want to build a long-term investment strategy using common stocks, investing in dividend paying companies puts you in the portion of the stock market where mistakes can be minimized, without sacrificing return. The chart below is an illustration of this. The desired section of the chart is toward the upper left corner, which represents higher returns with lower volatility. Note that dividend paying stocks are closer to the desired zone than non-dividend paying companies and companies that, even worse, reduced or eliminated their dividend payment – a clear sign of trouble.
You probably noted that the best performance and least volatility was provided by the rising dividend group. This group is predominated by the firms that are the most successful financially, indicated by their growing profits which support increasing the dividend regularly and at a more aggressive pace. Benefits provided by these companies are not only the rising income stream over time, but the fact that the rising dividend increases the yield these stocks offer, which effectively forces the share price higher over longer periods of time. Rising values and rising income – what could be better than that?
Typically, rising dividend companies don’t sport the highest current yield available. Some mature companies that don’t have promising growth prospects don’t need to reinvest as much in the company which makes more profit available to pay out as a dividend. These firms may yield more at the moment, but the stagnant nature of the dividend will be easily surpassed with patience by the rising dividend company. The hypothetical chart below shows how a company yielding 2% today but increasing its dividend at a 10% annual rate will surpass the income offered by a company yielding 4% but with no increases in the dividend.
In summary, we believe that based on historical evidence, investing in companies with a strong history of rising dividends provides the potential for above average returns with less stress along the way.
Integra Capital Advisors has managed a portfolio strategy known as the Elite Dividend Portfolio since 2004. The results have been attractive and the strategy is a great foundation for an investment plan that includes stocks. Call us today at 941-778-1900 or Click Here to set an appointment to discuss this strategy and your wealth management needs.