Performance of Dividend Payers versus Non Dividend Payers in S&P 500

I recently obtained the data behind the performance behind dividend and non dividend payers in the S&P 500 per year. This is a calculation performed by the index committee that separates members of S&P 500 into dividend paying and non dividend paying, and then equally weighting those portfolios. The performance of an equal weighted portfolio of dividend stocks is compared to the performance of an equal weighted portfolio of non dividend paying stocks.

Source: S&P/Dow Jones Data

The number of dividend paying stocks has varied over time. Currently, there seem to be 419 companies paying a dividends, out of 505 members of the S&P 500 index ( the difference is due to the inclusion of multiple share classes on the same company – e.g. GOOG and GOOGL)
Most companies paying a dividend are in mature industries. Most dividend stocks tend to be value stocks, which tend to decline by less during bear markets but still provide sufficient upside during bull markets.

Three Quality Companies Raising Dividends and Returns

As part of my monitoring process, I review the list of dividend increases every week. This helps me keep a pulse of dividend growth stocks I own, as well as the ones I may be interested in at the right valuation.  The companies that raised dividends over the past week in review include Microsoft, McDonald's and W.P. Carey.

In general, we want dividend growth stocks which have raised distributions for at least a decade, which was possible due to growth in earnings per share, and we want those at an attractive valuation. The quick review of each dividend raiser is focused on these general points of interest.

McDonald’s Corporation (MCD) operates and franchises McDonald’s restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally.
The company hiked its quarterly dividend by 7.40% to $1.01/share. This marked the 42nd consecutive annual dividend increase for this dividend champion. As a McDonald's shareholder, I am lovin' it! I celebrated the dividend increase with the two cheeseburger number two meal at my local establishment. McDonald’s has managed to boost dividends at a rate of 13.70%/year over the past decade. This was supported by an increase in earnings from $1.93/share in 2007 to $5.44/share in 2016. The company is expected to earn $6.52/share in 2017. Currently, the stock is overvalued at 24.40 times forward earnings and yields 2.50%. McDonald's would be a better value on dips below $130/share, and an even better one on dips below $109/share. I came up with these values by multiplying the forward earnings for 2018 by 20 and the earnings for 2016 by 20.

Share Buybacks and Dividends Are Not The Same Thing

Share buybacks have gained prominence in the past twenty years. The amount corporations spend on buybacks exceeds the amount they spend on dividends. Plenty of investors mistakenly believe that dividends and share buybacks are equivalent.

They are not.

I prefer dividend payments. When a company declares and pays a cash dividend, this is yours to keep. You can do anything with that cash. The dividend represents a return on investment, and an instant cash rebate on your original purchase back. Every shareholders receives the same treatment per each share they own. Plenty of investors these days hate dividends, because of their tax inefficiency. When you earn dividend income, and you are in the high tax brackets, you can pay over 20% to the government. These investors forget that most stock in the US is now held in retirement accounts, where taxes are either deferred for decades or they are tax-exempt. So the easy solution for most investors in the US is to buy stock in retirement accounts.

When a company declares a buyback, not all shareholders are impacted the same way (this example of course assumes that the company indeed follows through with the buyback, which is not always the case). When a company declares and executes a buyback, and you do not sell, you won’t have to pay a dime in taxes. Plenty of people love this idea, and focus on the tax efficiency aspect above everything else. However, the investors who sold their shares back to the company have to pay taxes on any gains, assuming they held the shares in a taxable account. By the way, if an index fund holds the stock, it needs to sell a portion of the shares, because the float is reduced from the share buyback.

My Favorite Pick Right Now

This is a guest post written by Mike McNeil, author of the Dividend Guy Blog and co-founder of Dividend Stocks Rock. Mike is currently investing $100,000 in a 100% dividend growth portfolio as the market trades at an all-time high.

Regardless where I look these days, I read alarming news about the stock market. Government debts are through the roof, there are tensions among many countries, debt is “too cheap” and we make a bad use of it, interest rates are climbing up and the stock market doesn’t listen to reality, like Icarus reaching for the sun. As Icarus’s story, once our wings will be burned by the sun, the fall will be fatal. This is obvious; everything is set to have the market crashes and burns.

I recently quit my job as a private banker to work full-time on my investing website Dividend Stocks Rock (DSR).  This is how I received $108,000 as a lump sum for my pension. What am I going to do with this new money? What should I do as a dividend investor? Should I keep money aside and wait for a correction?

This could be argued to be an interesting strategy if you think you can time the market. However, for a dividend growth investor, we should all know that time in the market is a lot more important than market timing. We should ignore the noise and keep investing. This is what I’m doing anyway. I decided to invest it all in the stock market now; because when the stock market goes down like this:

Three High Yielding Dividend Machines Rewarding Shareholders With a Raise

Over the past several weeks, there were three high yielding dividend growth stocks that raised distributions for shareholders. I am going to do a quick review on all three, using my criteria for evaluating dividend growth stocks.

I review the list of dividend increases every week. I then narrow the list down based on a variety of criteria such as minimum streak of annual dividend increases. The end result from the list today includes three high yielding companies that raised dividends over the past two weeks. The companies include Philip Morris International Inc., Realty Income Corporation and Verizon Communications.

Plenty of retirees I have gotten in touch with over the years seem to own those dividend machines. The question is, are those still good ideas today for accumulation?

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products. The company raised its quarterly dividend by 2.90% to $1.07/share. This marked the 9th consecutive annual dividend increase for PMI. The new annualized dividend payment is $4.28/year. This is a decent rate of growth from the annualized dividend payment of $1.84/share in 2008.

My Take on Real Estate Crowdfunding

I have been reading about real estate crowdfunding platforms over the past several months. Many of these platforms seem to market to investors, showcasing high dividend yields in the 8% - 10%/year range.

I was intrigued, and tried researching those. After all, if I can obtain 10%/year investing in real estate easily, I can just retire and call it a day.

I read the following two articles in my research:

Investing with RealtyShares – see how I’m doing with real estate crowdfunding by Joe Udo

How To Invest In Real Estate Without Owning Real Estate by Mr 1500 Days.

I essentially posted the following comment on both blogs:

I believe that all of those platforms are still relatively untested. And probably giving those platforms a try could be worth it with what many refer to as “play money”.

Perhaps I do not understand these well enough and need to do more research. However, why would individual investors like you and me get a cut out of lucrative Fundrise/Mogul real estate deals, when other REITs (like the ones in VNQ) could be easily taking on those projects? I keep wondering whether those private placement real estate platforms just include mostly higher risk projects that more established players have passed up on, and may not deliver the total returns we want. The real test would be how these platforms would perform during the next recession. It would be interesting to check these out in a decade, and compare notes on how things progressed.

A decade ago, P2P loans were a new thing. Many people invested in them through Prosper & Lending Club, and the forward results were not good.

The Magic Dividend Cocktail

This is a guest post by Mr Tako, who writes about investing and financial independence over at Mr Tako Escapes. The author is a financially independent dividend investor, who focuses his time on his family, investing and blogging. Mr Tako is living off dividends in retirement, which is the ultimate goal for most of us.

The dream of dividend growth investing is a dream about passive income -- An ever growing stream of passive income that lasts for decades and requires very little work to maintain.
That was my dream anyway, and for the most part I achieved it.

Unfortunately, the dream of passive income is easier to dream about than it is to achieve.  It takes work.  Dividends don't just keep growing out of "thin air" -- Companies have to actively make the right moves to keep those beautiful dividends growing.

This means investors must also find the right companies to stay invested in -- the ones with dividends that grow faster than inflation for long periods of time.

How does an investor find companies like these?  One great place to start is by identifying the four methods by which companies grow dividends...

19 Dividend Champions For Further Research

One of the most important factors that separate winning investors from losing investors is the ability to develop a process that you stick to no matter what happens. When you have a process, you take guesswork out of investing, and you stick to the plan through thick or thin.

Ever since I started focusing on dividend growth investing a decade ago, I have been able to invest my savings regularly, using my process. My process for identifying companies is very simple:

1) I start with the list of dividend champions, which includes companies that have raised dividends each year for at least a quarter of a century. This requirement ensures that I focus on quality companies with lasting business models

2) I eliminate companies that sell at high P/E ratios above 20. I believe that even the best company in the world is not worth overpaying for. I would much rather buy a quality company at a favorable valuation, than overpay for future growth. Valuation is important.

3) I eliminate companies with high dividend payout ratios. Dividend safety is very important, which is why I want to have a margin of safety in order to lower the likelihood that dividends will be cut during the next recession. Since I plan to live off dividends in retirement, I only want to focus on the companies that can deliver dependable dividend income for me.

4) I also focus on companies that have managed to boost dividends by at least 3%/year over the past 5 and 10 years. We want companies whose dividend payments will at least match inflation.

5) Last but not least, we evaluate the ten year trends in company’s earnings per share. We want companies that grow earnings per share. This provides fuel for future dividend increases and increases the likelihood that the intrinsic value of the business grows over time.

The dumbest argument against dividend paying stocks

One of the dumbest arguments against dividend growth investing is showing a single investment that failed, and thus implying that the strategy is not good. An opponent of dividend growth investing would usually use a company like Eastman Kodak (KODK), General Motors (GM), or one of the major banks like Citigroup (C) as an example of type of stocks that investors believed to be buy and hold forever.

There are several logical flaws with this argument.

The first issue stems from the fact that only some of the banks used in this argument have ever been dividend growth stocks at the time of their demise. General Motors, which was one of the bluest of blue chips for decades, had never been a dividend growth stocks, because of the cyclical nature of its distributions. Eastman Kodak was a dividend achiever once, having raised dividends for 14 years in a row through 1975, when the Board of Directors elected to freeze distributions. This was over 37 years before the company declared bankruptcy. Since 1975, the company had raised dividends off and on, but never for more than five consecutive years in a row. After the company cut dividends in 2003 however, no objective dividend investor should have held on to the stock.

Most dividend growth funds, such as the Dividend Aristocrats and Dividend Achiever ones, as well as many dividend growth investors would dispose of a security after it cuts or eliminates dividends. I do so too, per my risk management guidelines.

The second issue with the argument is that it misses the fact that only a portion of investments will be winners.  The thing about every single investment strategy out there is that only a portion of the investments you make will be winners. Even Warren Buffett has not made money on every single investment he has made. The man is happy if he can find a 40% hitter, and stick to them. A rational investor cannot expect to win on every investment he or she makes. However, if they maximize their gains by sticking to their stock holdings that are successful, they would more than make up for the losers over time.

The person making the isolated example of failure, merely uses this "argument" as a means to weaken Dividend Growth Investing by focusing on isolated "failures", while forgettting about the big picture. That's in an effort to make the strategy they are selling look better. This is why dividend growth investing failures are always exaggerated, while dividend growth successes are simply ignored. But in reality, this is sloppy thinking, which shows the person arguing misses the forest for the trees.

The third issue with this argument is that it ignores how General Motors, Eastman Kodak and the banks such as Citigroup were actually part of the S&P 500 or Dow Jones Industrial's Averages at the times of their dividend suspension or cuts. These companies were once regarded as the bluest of blue chips, and were members of all other major proxies for US stocks. If these are examples that should prevent investors from following a certain strategy, it looks like since these companies failed, the argument should be that investors should not buy stocks or should not buy index funds altogether. It means you should never invest in equities ever again. If investors are afraid that one or several of the companies in their portfolio will fail at some point in the future, they should never invest in index funds, or follow any stock investment strategy. Now that I have stretched the original argument, hope you can see its ridiculousness.

The fourth issue with the argument is that it ignores the fact that dividend investors hold diversified income portfolios, consisting of over 30 individual securities. If a few companies that the dividend investor has identified fail, that would surely hurt. However, the portfolio base would not be in dire straits, as the rest of the components would pull in their weight and raise dividend income over time to eventually reach record territory once again.

Even index funds may not be a magic panacea for poor investor performance. If the investor panics during bear markets, takes excessive leverage, or decides to wait in cash for months or years until the prices get cheaper, they might not make much money. Of course, index funds change approximately 5% of components each year. Those indexes look like daytraders when compared to dividend growth investors, who rarely sell, and hold through thick or thin.

The fifth issue is that dividend paying companies pay dividends and may spin-off companies to shareholders as well. As I have discussed before, dividends represent a return on investment, as well as a return of investment. 

For example, General Electric stock in 2020 is back to where it was at the end of 1992.

Yet, if you had bought 1 share of the stock for $6.86 at the end of 1992, you would have collected $17.80/share in total dividend income through 2020. The amount received in dividends is over two and a half times the amount of the original investment. If you reinvested those General Electric dividends, you end up with 7.69 shares of General Electric which is not bad.

Now imagine if you reinvested each quarterly dividend in a different company or a portfolio of companies. That money could have been invested elsewhere, and generate a respectable rate of return.

Other times, companies may spin-off subsidiaries. Eastman Kodak is one such example. The company went bankrupt in 2012, wiping out its shareholders.

If you invested $1000 in Eastman Kodak in 1957, kept spin-offs and invested dividends you would have $64,000 today.

Your positive returns are entirely due to the 1994 spin-off of Eastman Chemicals (EMN)

Few investors seem to think about investments like a business owner. And it shows.

The last issue with the argument is that it never provides alternatives to dividend investing. As a dividend investor I have spent thousands of hours researching and fine-tuning my investment strategy, and by digging through the information about the companies I am interested in. I have chosen to follow a strategy because it fits my goals and objectives. I typically ignore naysayers who tell me my strategy is bad, without providing me any clear alternatives to that.

In my dividend investing I expect that roughly 20% or so of companies I invest in will generate the majority of dividend and capital gain profits. The remaining will either break even or produce net investing losses. If the companies in the winning group go up tenfold in value with dividends reinvested over the next 20 years, with 40% doubling on average, while the companies in the losing group lose 50% of their value, I would expect that I would end up with a portfolio that could triple in value over a 13 - 14 year time period.

You are not going to come up ahead on all investments you make in your lifetime. But if on aggregate the ones you own end up throwing up more in income over time, you should do quite well for yourself.

In order to find quality dividend stocks for my portfolio, I start with the list of dividend champions, take them through my screening criteria, and then analyze each candidate one at a time. I then do the same exercise using dividend contenders/dividend achievers lists and try to make investments every month in those that offer the best values at the moment.

Full Disclosure: None

Relevant Articles:

- Dividend Investing Over the Past Seven Years Was Never Easy
- Dividends Make Investing Easier During Market Declines
- Key Ingredients for Successful Dividend Investing
- Is international exposure overrated?
- Frequently Asked Questions (FAQ) About Dividend Investing

Index Investing versus Dividend Growth Investing

One of the largest debates I have seen involves the debate on index investing versus dividend growth investing. Plenty of individuals who have already made a commitment to a strategy argue fiercely why their choice is superior.

An index investor will tell you that their way is superior to your way of investing.

A dividend growth investor will tell you that their way is better.

As usual, it is important to step back, and determine what drives those debates in the first place.

I believe that those debates are ego driven and not that useful for your ability to invest to reach your goals. Both sides may resort to bending statistics and facts to their liking, in order to “win” an argument. This is a dangerous exercise, because these individuals are actually learning how to justify their preexisting biases, rather than think objectively. When you double down on your position on a certain topic, you are focusing on your side of the argument, but ignore anything else. The debate is further driven down the drain by interested parties whole sole livelihood depends on selling you index fund portfolios or selling you dividend stock services.