John Buckinghman, is a industry leading money manager who focuses on diversification and long-term v...
Are Dividends Still Cool?
01/24/2013 7:30 am EST
Dividend-paying stocks have had a good run, but some experts are warning that the trade is becoming overextended. Charles Rotblut shares his current view of these markets.
Are dividends still cool? We're here with Charles Rotblut, who is going to answer that question for us.
Thank you. I do think they are. It's a common perception among investors that if they want to have rising stock prices, they should buy growth stocks that don't pay dividends, and then if a company starts paying dividends that's a bad thing.
Ned Davis Research has run the numbers. Since 2002, had you bought stocks that either initiated or raised their dividend, you would have got about 3,500% return. Had you bought stocks that didn't pay a dividend, your returns would have been about 70%. You still would have made money, but that's a huge gap.
So this perception that dividends aren't cool, that you can't make money, is actually wrong. If you have a company that's paying dividends, has the ability and willingness to raise it, and you reinvest those dividends, you really can make a substantial amount of money in the stock market.
Back in the dot.com boom, you know, it was "growth is the new income," and now we kind of have that flipped on its head to a certain extent. Because I think perhaps 2008 and the flight to safety and looking at what used to be traditional dividend stocks, and then once those were all bought up, everybody started throwing out dividends and we have MLPs and Canadian Royalty Trusts and new vehicles that are kicking off big dividends. Can it go too far though? How do you protect investors from thinking that income is the new growth when actually income is the new income?
Well, I think at the end of the day, it comes down to valuation. Any stock is attractive at a certain price. With some of these dividend stocks, we are starting to see them getting more pricey.
Sempra Energy (SRE) is a good example, where its yield is actually near the low end of its five-year range. So if you look at the range of where the yields have been-for instance, it was between 3% and 7%, the yield's down to 3%-that suggests the stock is overvalued.
AT&T (T), a stock we hold in our dividend investment portfolio, pays a 4.3% yield. Very attractive on an absolute basis, but relative to what that yield has averaged over the past five years, it's actually low, and yields are inverse to valuation, so the lower the yield the higher the valuation.
One of the things people need to pay attention to is how does the yield compare to its historical range. But the other thing in terms of yields is, a lot of people think, "I need to buy utilities. I need to buy master limited partnerships."
The second largest group in terms of paying dividends is now technology, and you know Apple (AAPL) to a certain extent has made dividends cool, because Apple is a tech company...
Apple makes everything cool.
Right, and the thing is you have this tech company which has all this cash on their statement, and although earnings and sales are important-rising earnings and sales-if a company is accumulating too much cash, it's problematic. You don't want it burning a hole in the CEO's pocket. You don't want them thinking, "I have all this cash in my pocket...let me go buy something."
You're better off having them initiate that dividend, because it holds them accountable. Now just like you have a mortgage payment or a car payment, you're not going to blow your budget, because you know you have this payment to make. For a CEO, he knows he has dividend payers, dividend shareholders he needs to make happy and be responsible and accountable to.
Right, and you have the same thing with high-margin businesses like Microsoft (MSFT) and you know Intel (INTL) with the commodity business, and Qualcomm (QCOM). They have some really interesting tech names, and Qualcomm's had a dividend for years, right? I mean, before it was cool to have a dividend.
Right, and Intel is quickly becoming a high-yield stock. I mean, part of the problem that its prices lag, but if you look at it right now, your gain is high yield.
Demand for PCs isn't going away. I know everybody has an iPad, but if you're running a business you still need the PC. There are still things you can do on a PC you can't do on an iPad.
They also have the server business and they're now coming out with their own smartphone. So if you're looking at a high yield, there is still potential upside for a stock like Intel, which I should say we do hold in our dividend investing portfolio.
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