Are You Missing Out on Dividends?

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." -- John D. Rockefeller

That sounds nice, doesn't it? Just kicking back and letting your dividends roll in. But we live in a much different time than Rockefeller. And though investing legend Ben Graham was also a big fan of dividends, there's also a gulf between his era and ours.

Or is there?

There's been a lot of talk about dividends lately -- enough to make me wonder whether just like porkpie hats and leggings, dividends might be making a comeback. Of course, unlike leggings, dividends may actually be a worthwhile return.

Go where the income is
It made perfect sense for both Rockefeller and Graham to tout dividends because back in their day, they could snag dividend yields that topped the payouts on government bonds and get the upside potential of equities. For decades, though, that hasn't been the case. For those who like to see cash hitting their bank account, government bonds have offered a much more handsome payout than stocks.

But that has changed lately. Though the market's rebound over the past year has once again given bonds the income advantage, according to data from Yale's Robert Shiller, 2008 closed with the dial pointing toward stock dividends -- the first time that's happened since the late 1950s.

Source: Irrationalexuberance.com, author calculations.


Source: Irrationalexuberance.com, author calculations.

In other words, today, income investors have an opportunity in front of them that they haven't seen in decades: Get income similar to bonds while capturing the upside potential of equities.

But don't take it from me. The world's pre-eminent bond investor, Bill Gross, is pushing his firm PIMCO into stocks precisely because he's concerned about the bond market and sees better opportunity in equities. Back in November of last year, Gross took the unusual step of saying that utility stocks and their 5% to 6% yields looked attractive.

But there's more
There's no two ways about it: We live in uncertain times. High unemployment has been annoyingly stubborn during our supposed recovery, and while we have seen some economic growth, folks like Gross and his co-investor-in-chief Mohamed El-Erian see a "new normal" ahead where economic growth doesn't look like it did in the past. Some think we could even be in for a double-dip recession.

So it's no shock that investors are having a tough time trusting the rosy talk of company CEOs and market commentators. After all, talk is cheap. However, when a company commits to paying a higher dividend, it's suddenly putting its money where its mouth is. Or so to say.

Through June 18, 135 companies in the S&P 500 had raised their dividends versus just two that had cut them back. That group includes tech giant IBM (NYSE: IBM  ) , which raised its quarterly payout 18%, and coffee-slinger Starbucks (Nasdaq: SBUX  ) , which announced its first-ever dividend.

Because shareholders tend to react very badly when dividends are reduced, it's no small decision for management to significantly boost the company's payout -- let alone introduce a brand-spanking-new dividend. In other words, management at both of these companies obviously feels good about what's ahead.

You want some of this yield?
With more than a quarter of S&P 500 companies raising their dividend so far this year, there're obviously quite a few stocks that would get the attention of income-oriented investors.

Currently, IBM yields 2% and Starbucks yields 1.5%, and while higher dividend growth may make those stocks attractive, they probably won't perk up the ears of hardcore dividend investors. There are, however, plenty of companies out there that recently have raised their payout, but also have a current yield above the 3.1% payout for 10-year U.S. Treasuries. Here are just a few of them:

Company

Current Yield

Recent Dividend Increase

Procter & Gamble (NYSE: PG  )

3.2%

10%

Coca-Cola (NYSE: KO  )

3.5%

7%

Kimberly-Clark (NYSE: KMB  )

4.3%

10%

Public Storage (NYSE: PSA  )

3.4%

23%

PG&E (NYSE: PCG  )

4.3%

8%

Source: Capital IQ (a Standard & Poor's company) and Yahoo! Finance.

Besides the obvious -- that is, the attractive yields and recent payout boosts -- what you'll also notice is that these are relatively large, reliable companies.

Coca-Cola defends its profits (and payouts) primarily with the seemingly unassailable Coke brand, while P&G and Kimberly-Clark do the same with a portfolio of high-caliber brands. For P&G, that lineup includes the likes of Mr. Clean and Gillette, while Kimberly-Clark offers Huggies and Kleenex.

PG&E and Public Storage are similarly stable, but for a different reason. Both own collections of valuable assets that keep up a steady inflow of cash. PG&E is a utility holding company that owns assets that provide Northern and Central California with electricity and natural gas, while Public Storage owns a vast number of self-storage facilities in both the U.S. and Europe.

So if adventure and excitement in the stock market are your bag, then these top-flight dividend stocks may not be your ideal investment. But don't say I didn't warn you, because who knows when we'll see this kind of dividend-friendly opportunity again.

Got some great dividend stocks not included above? Head down to the comments section and share them.

Before you hit the buy button on that dividend stock, you may want to check out the five keys to successful dividend investing.

Coca-Cola is a Motley Fool Inside Value selection and Starbucks is a Stock Advisor pick. Kimberly-Clark, Coca-Cola, and Procter & Gamble are Income Investor picks. The Fool owns shares of Coca-Cola and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy

Fool contributor Matt Koppenheffer owns shares of Coca-Cola but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


Read/Post Comments (12) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2010, at 4:48 PM, invest22com wrote:

    Mr. Koppenheffer,

    I am an income investor and think your article is spot on with the above recommendations. However, the expiration of the tax rates on dividends will take a big chuck out of the income (if not extended). Will this have any effect on your recommendations?

    Thanks,

    www.invest22.com

  • Report this Comment On June 28, 2010, at 5:37 PM, TMFKopp wrote:

    @invest22

    Great question. And not to dodge that great question, but the answer depends a lot on the situation of the individual investor and whether the tax increase goes through as planned.

    For investors with their assets in tax-advantaged accounts, for instance, the increases shouldn't really have them skipping a beat. For non-dividend-advantaged accounts, the extent of the increase will depend on the individual's tax bracket.

    As to the latter point, call me crazy (and I'm sure I am), but I'm still holding out that Congress will have an ounce of sense to realize what a bad idea these higher rates are.

    Matt

  • Report this Comment On June 28, 2010, at 6:32 PM, sagitarius84 wrote:

    Those are some great dividend picks. I would add Johnson & Johnson along with those other dividend stocks as well:

    http://www.dividendgrowthinvestor.com/2010/04/16-quality-div...

    Long JNJ

  • Report this Comment On June 28, 2010, at 8:28 PM, invest22com wrote:

    Matt,

    Like you said, everyone is different and the answer really depends on your situation and positions within your particular portfolio. Thanks!

    I hope Congress has that ounce of sense. However, sometimes I am not too sure.

    With that in mind, the search for tax-advantaged positions begins (just in case)!

    www.invest22.com

  • Report this Comment On June 28, 2010, at 9:31 PM, TMFKopp wrote:

    @invest22

    "I hope Congress has that ounce of sense. However, sometimes I am not too sure."

    As I pointed out in another article today (http://www.fool.com/investing/general/2010/06/28/our-governm..., Congress can miss the mark by a mile at times... (sigh)

    We can only hope that they're a straighter shot when it comes to dividend taxation.

    Fool on!

    Matt

  • Report this Comment On June 28, 2010, at 11:31 PM, rd80 wrote:

    Mickey D's has pulled back to decent valuations and should announce its next dividend raise in Sep.

  • Report this Comment On June 29, 2010, at 3:10 AM, cordwood wrote:

    Matt,any thoughts?

    Suggestion:

    UHS,[Universal Health Services] and UHT [Universal Health Trust] --

    Interesting combination,respectively, for taxed and tax advantaged accounts.

    Long time Long Both...and happy

  • Report this Comment On June 29, 2010, at 8:46 AM, RobMonaco wrote:

    These are great stock picks for a low risk portfolio, but I would not call them great dividend picks.

    For my dividends I prefer bonds and there have been a lot of nice issues for the last two years.

    For example:

    AKZO NOBEL 7,25%

    RALLYE 8,375%

    GAZPROM 8,125%

    ADECCO 7,625%

    ARCELOR 9,375%

    HEINEKEN 7,125%

    PEUGEOT 8,375%

  • Report this Comment On June 29, 2010, at 3:03 PM, TMFKopp wrote:

    @corwood

    I can't say that I'm terrible familiar with either of those. UHT certainly looks interesting though -- good yield and a very good dividend track record. At least from a dividend perspective though, UHS isn't terribly interesting -- not much of a yield and a fairly short and unimpressive track record.

    Care to share your pitch on these two?

    @RobMonaco

    You're getting great yields there for sure and that certainly might a direction for yield-hungry investors to look. However, by going that route you do pass up the opportunity to have either your payout or your principal grow.

    Matt

  • Report this Comment On June 29, 2010, at 5:04 PM, cordwood wrote:

    Matt,

    UHS was a suggestion for taxable A/C s,i.e not much taxable dividend,but w/ good cap. gains.

    UHS "...fairly short and unimpressive track record" ? ..I disagree- UHS incorporated in 1980. Unimpressive track record,hardly, to whit :

    Stock appreciation: [approx.]

    15 year 2year

    UHS 3500+% 30%

    PG 700% 3%

    KO 500% 1%

    KMB 500% 3%

    PSA 2400% 18%

    PCG 2.50% 5%

    My favorite peeve is that MF writers do not,as a general rule, include "total return",[that is w/ all dividends REINVESTED], when discussing stocks . The above table values would be quite different if TR was used.

    Would it be too laborious to include TR when discussing stocks.....software to calculate TR is not available at MF??

    Total Return is what investing is about and omiting the compounding of the dividends from the data results in an incomplete analysis --except for those investors that are seeking income only.

    Cordwood

  • Report this Comment On June 30, 2010, at 3:43 PM, TMFKopp wrote:

    @cordwood

    "UHS "...fairly short and unimpressive track record" ? ..I disagree- UHS incorporated in 1980. Unimpressive track record,hardly, to whit :"

    Sorry, I should have specified. Since this was an article about dividends, that comment was directed at UHS' dividend track record.

    "My favorite peeve is that MF writers do not,as a general rule, include "total return",[that is w/ all dividends REINVESTED], when discussing stocks ."

    All I can tell you is that I try to use it where appropriate. If you're ever looking for TR info, the historical prices at Yahoo!Finance are adjusted for dividends and splits.

    Matt

  • Report this Comment On June 30, 2010, at 3:49 PM, TMFKopp wrote:

    @cordwood

    Also, the returns on UHS are very impressive, but I don't look at stock returns as a track record. It may reflect revenue growth, increased profitability, etc, but I'd prefer to look at those things.

    By the way, I completely agree with this:

    "Total Return is what investing is about"

    Matt

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