Are We in the "Golden Age of Dividends?"

Following two consecutive days of losses, U.S. stocks rebounded nicely today, as the S&P 500 (SNPINDEX: ^GSPC  ) , and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) gained 1.5% and 1.2%, respectively.

Consistent with those gains, the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, fell 11.7%, to close at 16.41. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.)

Buy dividends, don't trade them
One group that narrowly outperformed the broad market was dividend shares, as measured by the Dow Jones U.S. Select Dividend Index, which rose 1.6%. (The Dow Jones U.S. Select Dividend Index is a dividend-weighted index of one hundred stocks with an average dividend yield of 3.64% at the end of May.) Curiously, while high dividends help to anchor stock valuations -- and, therefore, stock prices -- high-dividend stocks have been more volatile than the broad market recently:

^DJDVP Chart

^DJDVP data by YCharts

Part of the explanation for this volatility is that dividend shares have generated much interest in the yield-deprived environment of quantitative easing and zero interest rates. There is no denying their appeal: Dividends, in line with corporate earnings, have been very robust in the wake of the financial crisis.

In fact, at the Morningstar Conference in Chicago today, Hersh Cohen, who has been investing professionally for 45 years, told Barron's Michael Santoli that we are in "the golden age of dividends," adding: "I've never seen anything like the last five months: Dividends have exploded to the upside." To back up his claim, Cohen, the co-manager of the Clearbridge Equity Income Fund, cites recent double-digit percentage dividend increases by Caterpillar (NYSE: CAT  ) , Target (NYSE: TGT  ) , and Texas Instruments (NASDAQ: TXN  ) .

Just don't mention the "dividend trade" to Cohen -- he doesn't like the term:

"I think the word 'trade' might lead people to think about dividends in the wrong way. To me, dividends are not a trade. Dividends and dividend growth are a 10, 20, 30-year program people ought to be thinking about. If people think they are going to get bullish on dividend stocks after they've gone up and get upset when the market corrects as it is now, they'll never make money, never get the compounding effect."

I think that's the right way to think about dividend investing: The attractiveness of dividends is inextricably linked to the magic of compounding ... and that magic doesn't happen overnight.

If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report, "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth, and whether bigger dividends are better. Click here to keep reading.


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