Why Invest in Dividends?

Dividends can deliver a significant part of your total return, without forcing you to sell.

May 5, 2014 at 10:50AM

As soon as you buy a share of stock, you become a part-owner in the company that issued it. The longer you hold on to that stock, the more your total return will depend on how the company's performance and the market's expectations change over time. If all goes well, your shares should be worth more in the future than they were when you bought them.

However, there are no guarantees in the market, and dividends can provide a significant part of your total return. Those are two good reasons to consider dividends as part of your investing strategy.

No guarantees?
The market is forward-looking, and every company is priced based on what the market thinks it will achieve in the future. The past is important, of course. After all, it showcases what the company is actually capable of achieving. Also, what an already successful company did in the past typically provides the infrastructure and much of the funding it needs to continue to achieve in the future.

Because a company's future prospects drive its market price, if its fortunes turn sour, it will likely see its market price collapse as well. Consider General Motors, which was once the world's largest company by market value. Shareholders who owned that iteration of General Motors lost almost everything after the company declared bankruptcy in 2009. The one thing shareholders in the old General Motors didn't lose in that bankruptcy was the dividends they had collected over the years.

Think total return
While retaining dividends does provide something of a consolation prize for investors when their companies' fortunes wane, dividends typically provide a key part of an investor's total return. For the real-money Inflation-Protected Income Growth portfolio, those dividends help in two ways. First, they provide current income as part of the portfolio's total return. Secondly, dividends are the primary engine the portfolio uses to try to fight inflation, as dividends have the potential to increase over time.

iPIG portfolio holding Raytheon (NYSE:RTN) showcases how both of those factors work. Since last week's update, Raytheon paid its dividend and handed investors $0.605 per share. That $0.605 dividend was 10% higher than the $0.55 dividend Raytheon paid in the previous quarter and the same quarter last year. The increase was substantially ahead of the official inflation rate, and at Friday's closing price of $95.83, it represents a yield around 2.5%, or about 2.5% of potential return from the dividend alone.

Similarly, later this month, the iPIG portfolio expects to receive dividends from fellow holdings Texas Instruments (NASDAQ:TXN), Hasbro (NASDAQ:HAS), and Kinder Morgan (NYSE:KMI). As the table below shows, each of those companies is expected to pay a dividend higher than it paid in this quarter of last year:

Company

May 2014 Dividend

May 2013 Dividend

% Change

Annualized Yield from Current Dividend

Texas Instruments

$0.30

$0.28

7.1%

2.6%

Hasbro

$0.43

$0.40

7.5%

3.1%

Kinder Morgan

$0.42

$0.38

10.5%

5.1%

Data from Yahoo! Finance and company websites, as of May 5, 2014.

Kinder Morgan has announced that it expects to declare $1.72 in dividends for 2014, which means it needs to continue increasing its dividend to make that expectation. Hasbro's increase, like Raytheon's, represents its new payment at a recently increased rate.

Texas Instruments' dividend, on the other hand, is its third quarterly payment at its current rate. Still, the company's dividend history Web page includes a video in which its CFO indicates that the company expects to continue to generate sufficient cash to enable further dividend growth.

Those pennies add up
All told, the iPIG portfolio has received $1,129.87 in dividends, net of foreign withholding taxes, since its December 2012 launch. That's a decent chunk of change, given the portfolio's $30,000 starting point. As of Friday's close, the portfolio's total market value stood at $41,015.77, which makes those paid (and growing) dividends a significant contributor to the iPIG portfolio's total return.

There are no guarantees in investing, but receiving cash in your pocket without having to sell is a wonderful benefit of a dividend-oriented investing strategy. Beyond that, the smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby.

Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, click here. To see the iPIG portfolio's online tracking spreadsheet, click here.

Chuck Saletta owns shares of Hasbro, Kinder Morgan, Raytheon Company, and Texas Instruments. The Motley Fool recommends General Motors, Hasbro, and Kinder Morgan. The Motley Fool owns shares of Hasbro, Kinder Morgan, and Raytheon Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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