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July, 2011
Dividend-Paying Stocks Gaining Momentum

As uncertainty at home and abroad roils the financial markets, income-minded investors seeking protection from the bumpy road ahead may find dividend-paying stocks offer an attractive mix of features and warrant a place in their equity portfolios.

Several factors adding momentum to the dividend-investing strategy have emerged recently. For instance, the dividend rate for the S&P 500 has risen 7% from year-end 2010 and is 15% higher than a year ago. Standard & Poor's reported that additional dividend hikes are likely in 2011 due to corporate profits that are expected to reach record levels by year-end 2011, low interest rates, and an all-time high in corporate cash.1

Another positive sign came earlier this spring after the Federal Reserve gave healthy banks the nod to begin deploying their cash as they saw fit. In response, six of the country's largest banks said they would issue a total of $8.7 billion in new dividend payments to shareholders.2

The Benefits of Dividend-Paying Stocks

If you own stock in a company that has announced it will be issuing a dividend, or if you are proactively considering adding an allocation to dividend-paying stocks, history provides compelling evidence of the long-term benefits of dividends and their reinvestment.
  • A sign of corporate financial health. Dividend payouts are often seen as a sign of a company's financial health and management's confidence in future cash flow. Dividends also communicate a positive message to investors who perceive a long-term dividend as a sign of corporate maturity and strength.

  • A key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.

  • Potentially stronger returns, lower volatility. Dividends may help to mitigate portfolio losses when stock prices decline, and over long time horizons, stocks with a history of increasing their dividend each year have also produced higher returns with considerably less risk than non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats -- those stocks within the S&P 500 that have increased their dividends each year for the past 25 years -- produced annualized returns of 11.17% vs. 8.53% for the S&P 500 overall, with less volatility (14.22% vs. 15.21%, respectively).3

The Growth of Dividend-Paying Stocks, 1950-2010 4

If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in mind.
  • Dividend-paying stocks may help diversify an income-generating portfolio. Income-oriented investors may want to diversify potential sources of income within their portfolios. Given current realities present in the bond market, stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market.

  • Dividends benefit from continued favorable tax treatment. The extension of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill passed in late 2010 extended the 15% tax on qualifying dividends and other forms of investment income through December 31, 2012.
Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice.

1 Source: Standard & Poor's, Global Equity Strategy, March 28, 2011.

2 Source: The Wall Street Journal, "Banks Get Fed's Nod to Pay Dividends," March 19, 2011.

3 Volatility is measured by standard deviation. Past performance is no guarantee of future results.

4 Source: Standard & Poor's. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad U.S. stock market. For the period January 1, 1950, through December 31, 2010. Past performance is not indicative of future results. Investors cannot invest directly in any index.

© 2011 Standard & Poor's Financial Communications. All rights reserved. | Sitemap | Disclosure

©2011, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc. Reregistered Investment Advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement

Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.