What’s All the Fuss About Dividend Investing?

Falling interest rates have turned age-old investment rules of thumb upside down.  Professional investors often compare the dividends of stocks to the income that a bond might pay.  Bonds typically pay more income than stocks.  This is generally accepted by investors as they traded in the potential for growth of a stock for the potential of higher income with a bond. 

It is important to note that when investing in a stock, total return is calculated by finding the change in price of the stock and adding the dividends paid during the holding period.  As companies came to rely less and less on dividend payments to attract investors in the 80s and 90s, the total return focus became a niche and the concept of total return was somewhat lost in the shuffle of a go-go growth cycle.  Meanwhile, a major bond bull market brought interest rates (and thus bond yield) down, too. 

For the past several years, interest rates have continued to decline ultimately reaching current near-record lows.  This gets interesting when you begin compare the yield of government bonds – a 10 year US Treasury yielded 1.92% as of 9/30/2011 – to the dividend yield of the S&P 500, 2.3% at the same time.  The chart below goes further to analyze this phenomenon across countries. 

Source:  JPMorgan Asset Managment, FactSet, MSCI.

Research from Bespoke Investments as shown in our next chart indicates that the 10-year Treasury yields are currently around 2% as of 9/14/11.  They go on to note that 46% of stocks in the S&P 500 pay a higher dividend than this bond yield.  In times of uncertainty, it is fair to point out that the relative safety of Treasury yields may not be a fair comparison.  Risk assessment is always critical in analyzing investment decisions. 

 Source:  Bespoke Investments

No investment theme bats 100% and a dividend-focused stock strategy requires time and risk tolerance that must be carefully considered.  Today’s investment landscape is unique.  I can see why a dividend-focused investment theme is worth a second look.

 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index. Dividends are not guaranteed and must be authorized by the company’s board of directors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. FTR is not closely followed by Raymond James Research. Raymond James makes a market in FTR. Raymond James Financial Services, Inc., its affiliates, officers, directors or branch offices may in the normal course of business have a position in any securities mentioned in this report. All stock prices are quoted as of 9/14/11. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors.