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Long-Term View Enhances Dividend Strategy

08/22/2012 10:00 am EST


John Buckingham

Editor, The Prudent Speculator

John Buckingham reviews the long-term performance of dividend-paying stocks, and explains why he advises investors to keep a long-term outlook in order to get the full benefit.

More than one reason to like dividend players. I am here with John Buckingham, and we're going to talk about stocks and dividend and income.

Well, I think it is a very interesting time. It's always an interesting time for the market, but these days you have such a low interest-rate environment, there just aren't a lot of good places for investors to get income. So there are really strong reasons why you should want to focus on dividend-paying stocks...but income is just one of those reasons.

You know, right now, the yield on the S&P 500 is over 2%,where he yield on the ten-year Treasury is under 2%, so you certainly have a yield story there. But more importantly, perhaps, is that dividend-paying stocks have historically delivered the best returns over time; better than non-dividend paying stocks.

We have crunched the numbers going back to the 1920s to prove that, and they've done so-believe it or not-with lower volatility, so you have higher returns, lower volatility, and an income stream to boot. And of course, equities historically have delivered the best returns of the general asset classes. So there's a lot of reasons to like stocks these days, and a lot of reasons to like dividend-paying stocks.

With the hunt for dividends and yields that we've seen-at least for the past six months; almost a year at this point-people's flight to safety, all the other issues that people are getting out and you hear a lot the mantra that income is the new growth and things of that nature. Do you feel it affects the volatility of some of those dividend stocks now that there are so many more dividend-paying stocks?

I mean, Apple (AAPL) is a dividend stock now, and everybody keeps following a lot of tech stocks that are now kicking out dividends. Will that affect it, or do you see that as actually more proof of your belief?

Well, the volatility of the overall market has certainly been pretty high these days, as the herd mentality has taken hold and risk-on, risk-off trades occur and stocks will rise or fall for no apparent reason. Maybe you figure the reason out after it is already happened.

So I don't really fear that it's a fad that people are into dividend-paying stocks just because they are told by their advisors or they read in the newspaper they should be buying those stocks. I think that dividends are here to stay.

We mentioned Apple. I like to say the coolest kid in school is now paying a dividend, which sort of validates that it is OK for most companies to do that. We have Intel (INTC), one of the stocks I really like, yielding over 3% with a P/E of 11 and I think excellent long-term growth potential. They just raised the dividend here not too long ago.

So I think that dividends are definitely something that are here to stay. And this issue of volatility is always interesting, because on a daily basis-think about in 2011. Where did the S&P 500 end the year? Almost flat. It was the least volatile year in stock market history in 2011, and I can say that with a straight face if my time horizon is measured in one-year increments.

If it is in daily increments-and we think back to the San Francisco MoneyShow, for example, when stocks were going up and down 4% a day-there was tremendous volatility along the way. But again, I think if investors can truly have that long-term time horizon, and can look at things with a long-term view, they will be far better off than tracking the daily fluctuations. Because inevitably, you are going to get spooked.

You know earlier this year, we had Goldman Sachs come out with the long goodbye, an article that says hey, it's time to buy equities. Well, that was after we had just run up 25% off the lows. And up until this point, it looks like it might have been a great market top.

And vice versa. You go back to October of last year-the doom and gloom was evident and we here heading into another recession and the world was ending; Europe was going to blow up, blah blah blah. And stocks are going to rally 25%. So I am a contrarian, and I like it when people are not that interested in equities. That's where I think we are today on that spectrum.

Related Reading:

Dividends May Be Our Saving Grace

2 Income Stocks Ready for Prime Time

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