NEW YORK (TheStreet) -- In a recent article, the headline queried, "Is Dividend Investing Doomed?" The conclusion was, "not the death of dividends" approaching, but rather, "that we could be witnessing the end of low-risk dividend investing." Nothing is further from what the history of dividend-paying stocks has been and nothing is further from what the future should bring from high yield, low-risk dividend-paying stocks such as Exxon Mobil (XOM), Wal-Mart (WMT), Coca-Cola (KO), Wells Fargo (WFC), and many, many more.
First, a little bit about the history of the role of the dividend in the total return of an equity.
Jack Bogle, legendary investor who founded the Vanguard mutual fund family, in his book Enough, says dividends have historically provided about 40% of the total return for stocks. That is why buying a stock that does not pay a dividend is called "dead money." That is also why of Warren Buffett's ten largest positions, eight pay dividends higher than the average of about 1.9% for a member of the Standard & Poor's 500 Index.
The trends of the future also favor dividend-paying stocks. Ralph Wanger, manager of the Acorn Fund which has topped S&P by more than 25% since its founding in 1970, advised investors that, "If you're looking for a home run -- a great investment for five years or 10 years or more -- then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge." The following three trends result in dividend-paying stocks having an "edge." Baby boomers are now starting to retire: about 10,000 are turning 65 every day. To pay for living expenses after quitting work, income is needed. Dividend-paying stocks, by far, are the best sources of income for individual investors. Wal-Mart, Coca-Cola, and Exxon Mobile are "Dividend Aristocrats," which means each has raised its dividend at least 25 consecutive years. That income record is far superior to a bond. It is also a significant factor for Warren Buffett being a major shareholder of the three aforementioned stocks. Buffett's largest position is in Wells Fargo, with a dividend yield over 2.70%. In the future, more will have to finance their own retirement. In 1998, 90% of Fortune 100 companies paid pensions. Now it is less than one-third. Those looking to fund a retirement that is decades away, and who researches the matter, will find that dividend-paying stocks outperform "dead money" investing. Investors are demanding that companies share more cash with shareholders. Carl Icahn and David Einhorn of Greenlight Capital with Apple (AAPL) is one such example. Dan Loeb with Third Point LLC hedge fund did the same with CF Industries Holdings (CF). This trend should lead to more companies offering and increasing dividends to appeal to all investors. In addition, according to Daniel Peris, Senior Portfolio Manager at Federated Investors, who wrote the book, "Dividend Imperatives," noted that there is a strong link between a company increasing its dividend and having its stock price rise, too. While not a trend, dividends perform a useful due diligence function for investors. The cash that goes out in a dividend payment cannot be faked on a balance sheet. A dividend also displays respect for all shareholders from the management. In an interview with the American Association of Individual Investors, Jesper Madigan, manager of several Asian income funds for the Mathews group, pointed out, "that of the more than twenty publicly traded Chinese companies revealed to be fraudulent, not a single one paid a dividend." The trends favor more and more investors buying equities that pay dividends. Those that have a history of increasing the dividend will be even more alluring. There is a huge appeal to getting a raise each year from Dividend Aristocrats like Coca-Cola, Exxon Mobil, Wal-Mart and others for simply remaining a loyal shareholder. Along with the allure of the stock price rising too, the future of investing in dividend-paying equities should be destined for further greatness for long term investors seeking a rewarding total return. At the time of publication, Yates held no positions in the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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