There are plenty of obvious reasons to invest in dividend stocks. Here are seven that might surprise you.
You probably don’t need any more convincing about the power of dividend stocks.
After all, you’re reading this story because you’re subscribed to an e-letter about income. You’re an income investor, which means your portfolio is likely filled with high-yielding and/or reliable dividend stocks.
Still, it’s encouraging every now and then to be reminded of just how powerful dividend investing can be – especially is this age of near-zero interest rates and low-yielding CDs, Treasurys and money market accounts. Dividend stocks have rarely been more essential. And the numbers reflect it.
Every month that passes without the Fed raising short-term interest rates, more investors flock to dividend stocks. The more they do, the more companies either initiate a dividend or increase their dividends.
The following dividend facts paint the picture of a U.S. stock market that now fully caters to income investors.
1) Eight-five percent of S&P 500 companies pay a dividend. That’s 424 out of 500 companies, to be exact. It’s the highest number ever, and well above the 10-year average of roughly 390 companies.
2) Most dividend growers since the dot-com boom. Of the 424 companies that pay a dividend, 339 of them have increased that dividend in the last 12 months. That’s the largest number of dividend growers since at least 2000.
3) Dividends per share are growing 11.5%. Over the past 12 months, S&P companies paid an average of $37.43 per share in dividends – 11.5% higher than the previous 12 months.
4) $356.1 billion in dividends. Measured by aggregate dollars, dividend payments in the past year have totaled $356.1 billion – 39% higher than the 10-year average.
5) In times of crisis, dividend stocks always outperform. Since 2011, the good times have been rolling on Wall Street. There hasn’t been a pullback of at least 10% in more than three years. When it happens – which it will; corrections are inevitable – you’ll be glad you own dividend stocks. Over the last 20 years, dividend stocks have outperformed the S&P 500 in 70% of months in which the index showed a negative return. Those months have been few and far between of late. Pretty soon, that will change.
6) The biggest dividend payers achieve large returns. The richest companies pay the largest total dividend. Exxon Mobil (NYSE: XOM), for example, shelled out $11.2 billion in dividends in the last year. Apple (NASDAQ: AAPL) wasn’t far behind at $11.1 billion. AT&T (NYSE: T) was next at $9.6 billion. And so on. The stocks that pay the big dividends typically thrive. The average total return (including yield) among the top 10 dividend payers in the 12 months ended June 30 was 17.6%.
7) The dividend payout ratio remains relatively low. Despite all the money U.S. companies are pouring into dividends, today’s payout ratios are fairly modest on a historical basis.
S&P 500 companies devote about one-third of their earnings to paying a dividend, just a hair above the 10-year average and well below the long-term average. The current 1.9% average yield among S&P 500 companies is less than half the 4.4% long-term average. In fact, it’s the lowest average yield since 2007.
That leaves room for plenty of growth. With record cash positions and balance sheets that have largely stabilized, U.S. companies can afford to return a higher percentage of their earnings to shareholders.
We may not reach the 56% payout ratio companies were paying in the 1960s. But even a 40% ratio would mean there are many more dividend increases to come.
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