|
 |
|
|
|||
|
|||
|
|
In today's fast-paced investing world, speculators often look to make a quick fortune on "the next Microsoft" or some other fast-growing company that operates in an exciting new industry. However, it would be shortsighted to focus entirely on volatile, unproven firms, while overlooking the numerous benefits offered by well-established, dividend-paying companies. Although many investors consider the current 2% yield offered by the S&P 500 to be trivial, it would be a huge mistake to dismiss dividends. In fact, a look back at statistical data over the past 75 years shows that nearly half of the market's total returns have come in the form of dividends. Between 1926 and 2004, dividends represented approximately 42% of the total return delivered by the S&P 500. Over that same span, it's been calculated that $1,000 invested in the S&P would have grown to $2.3 million if reinvested dividends are included, but only $90,000 without the dividends. If history is any guide, then dividend-paying stocks should also perform better than their non-paying counterparts over the long haul. Contrary to conventional wisdom, studies have shown that dividend payers handily outperformed non-payers from 1970 to 2000. At the same time, those same dividend-paying stocks experienced far less volatility. They could also be counted on to deliver stronger relative returns in difficult market environments. What's more, according to the latest data from Standard & Poor's, dividend-payers are still outpacing non-payers in today’s volatile marketplace. Tax Changes Favor Dividends
However, thanks to new legislation that took effect in 2003, the playing field has now been leveled, and a uniform 15% tax rate applies equally to both dividends and capital gains. As such, income-oriented stock investors now retain a much larger chunk of their gains. Over the past several years, thousands of companies have been quick to take advantage of the favorable new tax law. Instead of buying back shares to boost stock prices, an increasing number of firms have opted to return excess cash to shareholders in the form of dividends. Over 1,700 companies announced dividend increases in 2004, and many firms -- including a number of formerly tight-fisted technology companies -- initiated new corporate dividend policies for the first time. This trend, which has continued throughout 2005 and into 2006, has not only lifted the payouts that most income investors receive, but has also expanded the pool of quality income-paying candidates to choose from. The Importance of
Compounding Investing in high-quality stocks for the long term and then reinvesting the dividends is one of the best ways to build wealth. For this reason, many investors choose to enroll their securities in dividend reinvestment plans (DRIPs), which allow for automatic reinvestment of all dividend payments. (Carla Pasternak, editor of our High-Yield Investing newsletter, has developed an in-depth report on DRIPs. For more information on DRIPs, please visit this link to view that report.) DRIPs are powerful wealth-builders. By pouring your dividends back into more shares, DRIPs make it easy to harness the miraculous power of compounding. The beauty of compounding is that any little smidgen of money you can put to work now -- no matter how small -- can have an extraordinary effect on your wealth down the road. Take a look at this example: Let's assume you purchase 1,000 shares of a stock with a share price of $10 (for a total initial investment of $10,000). Let's also assume that this stock offers a 6.5% annual dividend and steady +10% share price appreciation each and every year. Because this stock's growth rate (10%) exceeds its dividend yield (6.5%), it's only natural to assume that capital appreciation would play a more important role in the stock's total returns over the long haul -- right? Well, if you thought this way, then you'd be dead wrong. Without dividends reinvested, after 30 years this $10K would turn into $292,107. That's a respectable gain, but you'd still end up with just 1,000 shares. With dividends reinvested for 30 years, however, that initial $10K would be worth over $1.15 million. Best of all, you'd now own 6,614 shares of stock. At year #31, those 6,614 shares would be generating more than $75,000 in annual dividend payments alone!
The bottom line is that dividends matter big time. And reinvesting the dividends earned from high-yield stocks matters even more. As you can see from our example, when you invest in companies with abnormally high dividend yields, you can make staggering profits. In fact, your dividend check can eventually grow so large that it surpasses the original price you paid for the stock. The exhilaration of "lapping" your stock that way is a feeling you'll never forget. What to Look for in a Solid Dividend-Paying
Investment Editor's Note: Throughout the remainder of this article, StreetAuthority.com founder Paul Tracy and his staff provide a closer look at ten stocks and funds with 7%+ dividend yields. To view the remainder of this article, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue... Good investing!
Paul Tracy founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators. Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S. Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
|
|
|||||||||||||||||||||||||
|
||||
Special
Deal for Our Web Site Visitors
