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A Heyday for Dividends

The Prudent Speculator is one of the top ten best-performing newsletters tracked by the Hulbert Financial Digest over the last 15 and 25 years. “Though our primary focus is always on buying broadly diversified portfolios of undervalued stocks that we think will provide substantial capital appreciation over the long term,...

“Though our primary focus is always on buying broadly diversified portfolios of undervalued stocks that we think will provide substantial capital appreciation over the long term, we can’t help but be enthused about attractively-priced shares of companies that also boast a dividend payout. After all, a significant portion of the total return of equities over the past eight decades has been provided by dividends and dividends reinvested.

“Indeed, depending on capitalization, studies have shown that anywhere from 24% to 35% of the total return on stocks, in any given year, has come from dividends, the rest coming from market appreciation and reinvestment. And, while many would argue that it shows more the miracle of compounding over long time periods than anything else, Ned Davis Research recently pointed out that since 1929, $100 invested in the price-only S&P 500 index has grown to $4,989 compared to $117,774 in the S&P 500 total return index. Simple math might suggest then that just 4.2% of the long-term total return on stocks has come from capital appreciation, while 95.8% has come from dividends and their reinvestment.

“Given that money market mutual funds, according to, have an average yield of only 4 basis points (that’s 0.04%), 6-month U.S. Treasury bills yield a minuscule 17 basis points and two-year Treasury notes yield a whopping 41 basis points, dividend payouts—comparatively speaking—also look to be very compelling. In fact, the yield on the Dow Jones Industrial Average is now 2.57% (257 basis points). Believe it or not, the Dow’s yield actually tops the 2.46% current yield on the 10-year Treasury bond, though more than a few would argue that it is not an apples-to- apples comparison in that there is technically no risk in Treasuries, assuming that they are held to maturity. ...

“Looking at stock market history and extending the analysis to the broad-based S&P 500, it has been nearly 50 years since stocks were as attractively valued versus Treasuries based on a relative yield basis. True, the de facto equity benchmark yields ‘only’ 2% today, so it has a ways to go before it catches the 2.5% yield on the 10- year. But aside from Q1 2009, when Treasuries actually yielded less than the S&P, data from Yale Professor Robert Shiller shows that it was December 1962 when last we saw such a small, 50 basis point or so spread. We know that the S&P has enjoyed handsome returns since the end of 2008, and this was also the case for 1963, 1964 and 1965. Data from Morningstar shows a total return on the S&P 500 in those three years of 22.8%, 16.5% and 12.5%, respectively.

“Looking at returns going back to 1927, as compiled by Profs. Fama and French, dividend-paying stocks have turned in vastly superior performance. In the Fama/French data series, $1 invested in non-dividend payers had grown to $696 by the end of 2009, while the lowest 30% of dividend payers saw the same $1 grow to $1,289. The numbers were even better for the middle 40% ($3,156) and the top 30% ($5,830). Also interesting was that the volatility of the three dividend- paying monthly-return series was well below that of the non-dividend payers. That noted, evidence is less clear on more recent comparisons of dividend/non-dividend payers on the Russell 3000 index.

“Still, Standard & Poor’s reports that dividend payers in the S&P 500 had an average total return of 6.1% over the first nine months of 2010, compared to a total return of 3.9% for the non-dividend-paying members. Happily, even with the modest 3.9% overall total return for the S&P index over the first three quarters of 2010, its yield has actually inched up 8 basis points from 1.95% at the start of the year. This is because many companies have boosted their payouts. In fact, per data through Sept. 30 from S&P, 167 S&P 500 members have increased their dividends this year while 10 have initiated or re-established a payout. This compares to only two companies that have decreased their dividends and one that ceased paying.

“Certainly, the trend is encouraging, especially as in 2009 the numbers were a lot worse, with 108 raising or starting against 67 that cut or suspended a dividend. No doubt, it helps that the economy has shown modest growth, that corporate profits have been on the mend and that there is a lot less pessimism in the executive suite. It also doesn’t hurt that corporate balance sheets are flush with cash and that a company like technology titan Microsoft (Nasdaq: MSFT) can issue $1 billion of three-year 0.875% notes just a day after announcing a 23% increase in its common stock payout. Incredibly, the software giant’s $0.16-per-quarter dividend means that its 2.63% yield now tops that of the 10-year Treasury.”

John Buckingham, The Prudent Speculator, October 5, 2010

John Buckingham leads a team that scours the equity markets in search of undervalued stocks for money management clients and newsletter subscribers. He is equally resolute in his management of Al Frank’s proprietary mutual funds. Mr. Buckingham has been a part of Al Frank Asset Management since 1987 and is the company’s largest shareholder. He has served as the firm’s Director of Research since 1989 and Chief Portfolio Manager since 1990. Mr. Buckingham graduated magna cum laude from the University of Southern California in 1987 with a B.S. degree in computer science and a minor in business administration. His opinion is widely sought: he has appeared on numerous television and radio programs, is frequently interviewed by publications and conducts workshops at investment seminars.