Stock prices have generally performed well in the past two years or so, and many stocks continue to offer attractive dividend yields. Some utilities, for instance, have had recent yields of more than 4.5 percent, while certain consumer stocks have paid over 2.5 percent; even a select group of high-tech companies have produced dividend yields surpassing 10-year Treasuries, according to data compiled by the “Wall Street Journal.”
The outlook for dividend initiations and increases is good, as well. Companies are sitting on large stockpiles of cash, and through May 31, 2011, over 150 companies raised their dividends.
Why Dividends Matter
Anecdotally, many investors’ interest in dividends seems to be negatively correlated with the equity markets’ performance. When the markets have a sustained move to the upside, capital gains take center stage. In bear or flat markets, a steady dividend starts to look attractive again.
But that attitude is shortsighted, of course: Dividends have accounted for about 40 percent of the S&P 500’s total return for the past 85 years.
Dividends offer potential income growth, as well. According to the spring 2011 edition of the “Mergent Handbook of Dividend Achievers,” 15 stocks in the Dividend Achievers Indexes have generated compounded annual dividend growth of over 20 percent for the last 10 years. That growth can provide valuable inflation protection, particularly for groups like retirees with high inflation-sensitivity.
While high dividends do not guarantee positive returns, dividends usually are a positive signal to the markets. In addition, notes Indxis Inc., a comprehensive index-services provider, companies that pay regular dividends tend to be in better financial health than their non-dividend-paying counterparts and produce sustained earnings and revenue growth.
Also, dividends help identify well-managed companies, the index provider says, adding that each dividend declaration “represents a promise by management and a vote of confidence by the board of directors in the company’s leadership.” Furthermore, companies that consistently raise their dividend payouts also raise the bar on their own performance expectations. And, finally, shares of dividend-paying companies possess built-in value that makes them generally more resilient in down markets, according to Indxis, with solid appreciation potential during earnings-driven market upturns and less price volatility.
Simply chasing the highest available yields can be risky, experts say, as companies paying the most outsized dividends might not be able to maintain their payouts. A better strategy is to seek stocks with long-term histories of increasing dividends, which is the logic behind the Mergent Dividend Achievers Indexes.
The indexes provide an objective composite of companies with a history of increasing dividend payouts. To qualify as a Dividend Achiever, a company must have increased its dividend payout each year for the last 10 or more consecutive years and meet certain liquidity requirements. Indxis maintains the Dividend Achievers Indices, which may be licensed as investable products, including mutual funds, ETFs, UITs, structured products, separately managed accounts, and others.
While some Dividend Achiever Indexes cover U.S. and foreign markets, the Broad Dividend Achievers Index is perhaps the best known to U.S. investors. The index is comprised of companies incorporated in the United States or its territories, trading on the NYSE or NASDAQ and able to show increased annual regular dividend payments for the last 10 or more consecutive years. (In addition, Indxis requires that a stock’s average daily cash volume exceed $500,000 per day in the November and December prior to the annual reconstitution date on the last trading date in January.)
According to Mergent, this index is calculated using a modified market capitalization weighting methodology and has been published by the American Stock Exchange under the ticker symbol DAA since December 5, 2003. The indexes are also dynamic: Companies are added or dropped as they meet or fail to meet the qualification requirements.