August 24, 2011

Cohen & Steers: Investors Should Seek High-Dividend Stocks

New report echoes recent comments by Wharton professor Jeremy Siegel

A new white paper released by investment manager Cohen & Steers on Monday maintains that dividend oriented companies are "strongly positioned to continue raising pay-outs and deliver solid returns." The report also says these companies are “trading at attractive prices and offer great upside potential.”

The whitepaper echoes a piece written by Jeremy Siegel, a Wharton professor and frequent industry lecturer, in The Wall Street Journal also on Monday, in which Siegel says dividend-paying stocks, backed by record amounts of cash, are a wise defensive move in light of the current environment.

In the Cohen & Steers report, entitled "Return of the Dividend Growers," Rick Helm, senior vice president and portfolio manager, points out numerous reasons for investors to seek out dividend paying stocks, including:

  • Since 1926, dividends have contributed more than 40% of the U.S. market's total return.
  • Dividend payers outperform nonpayers and do so with less volatility.
  • Dividends have been raised; net payments rose by a record $25.5 billion in the first half of the year.

“History tells us that quality companies with stable, growing dividends have generated better returns with less volatility than those that do not pay dividends,” Helm writes. “But when the economy is in the early stages of expansion, investors often gravitate toward riskier companies with the potential for the fastest earnings growth and multiple expansion. The latest cycle has been consistent with this pattern, leaving dividend growers behind in the stimulus-induced rally among lower-quality stocks.”

He then lists several reasons why this trend is changing:

  • Quality companies that can demonstrate consistent cash-flow growth stand to benefit as higher-risk capital appreciation opportunities become harder to find.
  • Improving earnings and large cash reserves have given management teams greater confidence to increase dividends, potentially bringing payout ratios back in line with their historical average.
  • Dividend growers have a history of performing well when inflation and interest rates rise; two macro issues of concern that may further enhance their appeal to investors.

The report also examines past trends for dividend-growth stocks and frames Cohen & Steers’ reasons for optimism about dividend paying stocks in the future.

"We think this is a long-term trend, not the trade-of-the-week," Helm says. "The combination of the investing demographics, the companies' cash on hand and other factors make dividend paying stocks attractive for the foreseeable future. When a company increases their dividend, it's really about their confidence in the company going forward. That's as important, if not more so, than the amount of the dividend they receive."

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