The Renewed Importance of Dividend-Paying Stocks
Gone are the days when investors can count on generating a sufficient level of income through government bonds and investment grade corporate notes. With $13.4 trillion of negative yielding bonds globally and the number of central banks that have set negative target rates seemingly growing by the day, investors must turn to other asset classes to meet their income needs. High yield or “junk” bonds offer the possibility of greater income; but, they come with the tradeoff of increased credit risk and a lack of liquidity, making them unsuitable for most conservative investors.
With bond yields at historic lows, dividend-paying stocks have increased in importance to many investors. “We are in an unusual time when a company’s dividend yield is often higher than the yield on its bonds. That has rarely happened over the last 50 years,” said Andrew Givens, First Fiduciary’s Senior Analyst. “And unlike the coupon payments of fixed income securities, dividends can and typically do increase over time. That potential for growth makes dividend-payers stand out as a good and appropriate investment option relative to bonds.”
Dividend-paying equities also provide the potential for capital appreciation. The ability to pay cash dividends is a positive factor in assessing the underlying quality of a company and its earnings. Dividend payouts demonstrate good corporate behavior and reflect management’s confidence in the future. Unsurprisingly, stocks that pay dividends have produced higher returns on average than non-dividend payers over the long-term. Dividend payers have outperformed non-dividend payers by almost 2% per year over the last 90 years.
Dividends play a major role in First Fiduciary’s investment process. “We invest in financially strong companies that have the ability and mandate to return cash to shareholders,” Givens said. “Our companies have defensible competitive positions and generate significant cash flow. We expect they will be able to grow their dividends over time. This has been a core tenet of our investment philosophy since the founding of the firm in 1975.”