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In 1934, Benjamin Graham and David Dodd wrote in their classic Security Analysis, "The prime purpose of a business corporation is to pay dividends to its owners." Many investors agreed. They considered that the other way an investor can make money from owning stock--via increases in its price--was speculation in comparison to a steady flow of dividends. But by the 1990's, investors' interest in dividends had pretty much dried up. With market prices rising 20% to 30% or more per year, and some individual stocks much faster than that, dividend yields of 2% or 3% were real yawners. They did not play much of a role in most investors' stock selections. Times change. The bull market of 1982 to 2000 is history. So is the tech-telecom bubble of 1997-2000 that capped it off. The bubble deflated, leaving investors who held on with losses of 90% or more. Those losses have finally been made up on New York Stock Exchange and S&P 500 stocks, but they may not be made up in our lifetimes on NASDAQ stocks. And guess what? The baby boomers--the first of whom (like myself) were born in 1946, are moving into retirement age. In 1999, the oldest boomers were 53 years old--accumulating money as fast as we could for retirement. Two percent or 3% dividend yields did not help much during the accumulation phase of our lives. Now we are 60. For some of us, the accumulation phase is over, and for many others, it is coming to a rapid close. Several thousand boomers per day are retiring, taking packages, or otherwise ending their regular working lives. And with retirement comes an interest in income! Retirees suddenly become less interested in two-baggers (a stock that doubles) than in satisfying their day-to-day money needs. For most boomer retirees, these needs are met through three sources: • Pensions. Many (not all) boomer retirees have traditional pensions. Their number will dwindle each year, because so many companies that used to offer conventional retirement plans dropped them and are continuing to drop (or freeze) them as we speak. People in the leading edge of the boomer generation are more likely to have traditional pensions than people at the trailing edge. (The latter were born in 1957, and they are now 49 or 50 years old). • Withdrawals from accumulated savings. Conventional advice is to limit these to 4% per year or so, or else you will outlive your money. (This category also includes annuities you may buy--an annuity basically automates the process of investing your savings and then withdrawing some of it each month and sending it to you as income.) • Dividends! Suddenly, that 2% or 3% that looked like junk in 1999 has some attractive qualities. If a boomer has saved, say $500,000, a 3% yield kicks out $15,000 per year. Not a fortune, but a good chunk of many boomers' income needs in retirement. Notice that I did not list Social Security. No boomer is eligible yet for Social Security. As boomers reach 62 or 65, of course, Social Security will kick in and become the fourth source for meeting daily money needs. Let's recap this so far. Let's say that a boomer who is already retired receives a pension of $25,000 per year, and also that he or she takes a drawdown of 4% of $500,000 savings, which equals $20,000 more per year. That's $45,000 per year from those two sources. Let's further postulate that this retiree needs $60,000 per year to live a good lifestyle. As we've already seen, if the boomer's $500,000 in savings kicks out a 3% yield, that's where the extra $15,000 will come from. So suddenly, a 3% dividend yield looks mighty interesting. In fact, it is the difference between a comfortable and uncomfortable retirement for our boomer. And boomers are displaying an increasing appreciation of formerly scorned dividends I have a ringside seat on the explosion of interest in dividends and income. As the author of a book on stock investing, I advertise on Google--I purchase those little clickable text ads that appear along with your search results. The way it works is, I only pay Google when someone clicks on my ad and is transported to my book's Web site. I have ads tied to a couple hundred investment-related search terms that might be typed in by a Google searcher. And I have noticed something very interesting: About 70% of my clicks come from the few search terms related to income and dividends. Terms like "dividend paying stocks," "dividend companies," or simply "dividends." In a recent week, for example, I got 46 clicks (for cost control, I limit the number of clicks I receive per day). Of those 46 clicks, 35 (more than three-quarters) came from dividend-related terms. This despite the fact that those search terms comprise only about 15% of all the search terms I cover. Every time someone clicks on a Google ad, it is like a vote. It indicates interest. So it is very clear to me that investors searching on Google are showing a massive interest in dividends and income. Happily, there is growing research that over the long term, dividend-paying stocks generate the best total returns. So the dividend-stock investor benefits in two ways: He or she gets an important income stream, and the stocks perform better overall. And there is yet a third advantage: Most dividends are taxed at 15% to the individual, which is lower than most investors' marginal tax rate. Thus, dividends are the most tax-advantaged form of income you can have. The lesson for investors, especially those needing income in retirement, is this: Make sure that your portfolio has a good slug of dividend-paying stocks. It is not unreasonable to shoot for an overall portfolio yield of 4%, which is about twice the yield of the S&P 500 at the moment. There are many safe, "boring" stocks with 4%+ yields available at reasonable prices right now. Add some to your stock portfolio.
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Dave Van Knapp is the author of "Sensible Stock Investing: How to Pick, Value, and Manage Stocks." Learn more about his step-by-step approach for individual investors at www.SensibleStocks.com . Or go directly to Amazon.com, where the book has a perfect 5-star reader rating: www.amazon.com/gp/product/059539342X/sr=1-1/qid=1155381420/ref=sr_1_1/002-5852738-5260830?ie=UTF8&s=books .
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