Dividend Channel Staff
Here's an interesting fact: if you invested in the S&P 500 ETF (SPY) on 12/31/1998, you would
have paid $123.31 per share. Fast forward to 12/31/2010 and each share was worth $125.75 on that date, just $2.44 higher
than you paid, for a paltry 2% gain over a period of 12 years.
Ah, but what about the dividend history over that same period? You may be surprised to learn that you
collected a whopping $20.53 per share in dividends over the same period, increasing your return to 18.6%. Put another way,
you gained $2.44 on the price of the shares, and collected $20.53 in cash along the way, for a total return (before
factoring in taxes) of $22.97 — so approximately 89% of your total return came from the dividend history, and the other
11% of your total return came from your capital gain.
This is a more ''modern'' example, but the same pattern holds for earlier dividend history as well: according to Professor
Jeremy Siegel at The Wharton School, until the early 1990's, roughly three quarters (about 75%) of the real
return from the stock market came from its dividend history, and the other one quarter (25%) from capital gains.
A key consideration about dividends (by the way, what is a dividend anyways?) is
that investors get their return the old fashioned way, being paid cold hard cash. Many companies pay dividends on a regular
recurring basis, some annually, some twice a year, some quarterly, and there are even a whole list of monthly dividend payers that put cash into your pocket each and every month.
Another key consideration about dividends is the payout ratio, or how much of the company's profit is used up in making their
dividend payments. A company paying only a small portion of its earnings out as dividends can presumably survive more of a
economic ''rough patch'' and continue to pay the same dividend even if earnings come down somewhat; but on the flip side,
companies with a lower payout ratio tend to trade at a much lower yield (as a general rule).
There are also certain types of companies that pay out nearly all of their earnings as dividends, either by choice or
by charter — Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs) are two examples of company
types that must pay out almost all of their earnings to shareholders. When companies pay out most of their earnings as
dividends, they tend to trade at a much higher yield (as a general rule), and an interesting ''discipline'' is also
introduced: If a company pays out most of its earnings, it can only grow the business if investors agree to commit new
capital by purchasing equity or debt, and investors will only make that commitment if management is consistently able to
generate strong returns.
By contrast, ''growth stocks'' are usually companies that pay no dividend, and the management of those companies then tend to
have to figure out ways to spend their profits — new products, research & development, acquisitions, etc. —
and other than voting for the Board of Directors, shareholders basically have no say about how that money is spent, and no
control over whether it is done so in an extravagant or reckless manner.
When we at Dividend Channel screen through our coverage universe of dividend paying stocks, to calculate our
DividendRank, we pay particular attention to attention to dividend history,
dividend yield, book value, and profitability. We rank our universe by a variety of proprietary metrics, with the aim to produce a list of the most
''interesting'' stocks at any particular time that appear to be profitable dividend payers trading at an attractive value.
Visit our Dividend Stock Screener section for a wealth of ideas to help you research dividend
stocks with a strong dividend history.