The Golden Rule: Make Sure You Get Paid

The truth is, we’re both right. The Dow-Jones Industrial Average rose in value by 5.1%. The rest of the gain came from company dividends, which averaged about 4.4% over that same period — bringing us to a total return of nearly 10%. The astonishing thing here is that throughout history (we’re talking 100+ years), dividends have made up nearly half of the total return on stocks. Yet, these days, hardly anyone pays any attention to dividends. It’s time to change that.

In the wild and crazy bull market, when people came to expect 25%, 50%, or even 100% gains in a year, who cared about dividends? What was a measly 4% when we were talking about doubling our money? Now, more people are concerned with not losing it. And, as you were told in ETR Message #665 (“Getting Back What’s Gone: Three Things You Can Do Right Now”), making sure you get paid, via dividends, is one of the best things you can do. Have you been guilty of “forgetting to get paid” over the past few years?

Take a look at your portfolio. How many of your stocks do not pay dividends? And just how well have those stocks performed in the past 18 months? Dividends are always important, but in the last two years they’ve been critical. Ed Yardeni of Prudential found that since the stock-market peak in March of 2000, companies in the S&P 500 stock index that DON’T pay dividends have fallen an average of 32%. Meanwhile, the companies in the S&P 500 Index that DO pay dividends have actually risen by 10% since the crash.

One reason why dividend-yielding stocks perform better is that dividend-paying companies have to earn cash to pay their dividends. This forces them to pay extra attention to cash flow, which is never a bad thing. So you get higher returns during down times, higher ROIs overall, and cash dividends. Those are three compelling reasons to favor these companies. It’s not only in bad times that dividend payers are winners. A recent Morgan Stanley study shows that the 100 highest-yielding stocks in the S&P 500 have bested the 100 with the lowest dividend yields since 1985.

So it amazes me that 140 companies in the S&P 500 Index, including Microsoft, don’t pay dividends. Ross Margolies, manager of the Salomon Brothers Capital Fund, said in a recent Barron’s: “It’s like the difference between marriage and living together. When you have a dividend, you’re making a commitment to pay it.” A company has to have cash to pay its dividend. Now is as good a time as any in recent memory to pay attention to dividends.

This is the first time since the early 1960s that stocks actually have a higher dividend yield than Treasury bills or bank deposits. This is a margin of safety (albeit small) that we haven’t had in an extremely long time. The last time dividends stayed above short-term interest rates was from the mid-1950s to the early 1960s. And stocks doubled in that time — in the face of rising rates. So where can you start your search for good investments? Wherever you start, make sure you’re getting paid.

Listen to the opportunity, but demand to get paid too. Here’s a small sampling of major stocks from five different industries that pay handsome dividends and offer some value (at a forward P/E of less than 20):

* 7.2% JPM, J.P. Morgan (banking)

* 6.4% MO, Philip Morris (cigarettes)

* 4.7% BMY, Bristol-Myers (pharmaceuticals)

* 3.7% CVX, Chevron-Texaco (oil)

* 7.9% EOP, Equity Office Properties (real estate)

As always, be sure to do your own homework when making your investment decisions. But use the knowledge you now have about the performance of dividend-paying stocks and make sure you take the “dividend factor” into consideration. You’ll make more money over the long run.