Dividend-paying stocks are everywhere today, but if we've learned anything as investors, it's that no two dividend stocks are ever alike.
Conjured up by businesses early on in the stock market's existence, dividends were a way to reward shareholders for sticking with a company by sharing profits with them on a quarterly, semiannual, or annual basis. Whether you realize it or not, dividend income has been a steady source of investment growth for generations of investors.
Today, I'd like to share you with you 10 dividend facts that I've come across through my own personal research that demonstrate the power, growth potential, and also dangers associated with investing in dividend-paying stocks.
Source: Andrew Magill, Flickr.
1. Apple (AAPL 1.27%), which holds the record for the highest market valuation in history, only began paying a dividend in August of last year after a 17-year dividend hiatus, but it is expected to pay out $11.08 billion in dividends over the next four quarters -- assuming it keeps its dividend steady. To put that all-time record annual payout into another perspective, Apple's annual payout is higher than the current market cap of 176 of the S&P's 500 components. In one year, Apple will give out more cash to shareholders than Best Buy, Southwest Airlines, or Alcoa is currently worth!
2. There are few things that income-seeking investors like more than buying into companies that have paid a dividend for decades or longer. The reason is that a steady history of payouts often establishes to investors the health of a business model. Only a handful of currently traded companies have paid out dividends for longer than 100 years,and I can find no company that has paid dividends in a concurrent manner for longer than the Bank of Montreal (BMO -1.04%), which has been divvying out dividend payments since 1829!
3. Sticking with the theme of longevity, dividend investors also love a company that has a history of boosting its dividend. Only a handful of companies are elite enough to join what's referred to as the Dividend Aristocrats club -- those companies that have raised their dividend for 25 or more consecutive years. No company, though, is more elite than ATM and security systems manufacturer Diebold (DBD), which earlier this year increased its dividend for a record 60th consecutive year.
4. With interest rates at arguably the lowest levels on record, the thirst for high-yield investments has boiled over since the recession into the mortgage-REIT sector, which has thrived on low lending rates. Over the past four years, agency-only mREIT American Capital Agency (AGNC -0.11%) frequently yielded close to 20%. But what I find truly incredible is that if you add up American Capital's dividend distributions over the past 20 quarters (five years), it comes out to $25.85 per share. With the stock valued at only $22.51 per share as of yesterday's close, shareholders have been given a 115% dividend payback just since the summer of 2008.
5. However, smart dividend investors know that it's not always about chasing the highest-yielding stocks. In fact, that strategy can often backfire in a big way because high-yielding stocks can sometimes mask low return on equity or a lack of long-term strategy with those hefty dividends. According to CBS MoneyWatch, over the past 60 years, the worst one-year, two-year, and three-year returns for strategies that involved buying solely high-yield stocks resulted in losses of 36.3%, 39.7%, and 33.6%, respectively. Comparatively, for five-year U.S. Treasuries over the same three time periods during the past 60 years, the worst returns were negative 5.1%, negative 1.7%, and positive 1.6%. If anything, this demonstrates once and for all that yield isn't everything.
6. Dividend payouts today are certainly a lot different than they were at the beginning of last century. As Foolish macroeconomic guru Morgan Housel has noted on multiple occasions, dividend payout ratios today are considerably lower now than they were during the higher-growth periods of the early 1900s. The difference in yield between the two periods within the broad-based S&P 500 as calculated by Robert Shiller is undeniable.
Source: Robert Shiller, Irrational Exuberance.
In 2000, when the dot-com bubble burst, the S&P 500's yield amounted to just 1.16%. By contrast, in 1932 during the Great Depression, the yield on the S&P 500 jumped to a whopping 9.52%!
7. Dividends have historically played a gigantic role in creating wealth for investors in the United States. In Susanna Kim's owns words from an ABC News report, "Of the S&P 500′s nominal total return from 1910 to 2010, dividend yield and dividend growth comprised 90 percent [of] returns for stock holders." I've certainly come across differing figures in other reports, but the message is the same: Compounding long-term dividend growth is a key driver of wealth appreciation.
8. Despite what might seem like relatively low yields and a modest payout ratio compared to the early 1900s, a rebounding U.S. economy compounded with the possibility of higher dividend taxes in 2013 created the perfect storm for big corporate dividend payouts in 2012. In fact, not accounting for inflation, last August saw U.S. companies pay out an all-time record $34 billion in cash stipends, according to Barron's. There's likely a higher figure out there if adjusted for inflation, but $34 billion is certainly nothing to sneeze at.
9. Dividend breadth -- the difference between the number of positive dividend actions in a given year as compared to negative dividend actions -- tends to be at its highest immediately following a recession (i.e., the recovery period). According to data from S&P Indices since 1999, dividend breadth hit a low in 2009 of 1.48 when 1,191 companies boosted their dividend and more than 800 reduced their payout. On the other end of the spectrum, 2004 saw dividend breadth hit a high of 37.06. Coming out of the dot-com bubble, 2,298 companies raised their dividend while just 62 saw their payouts fall that year. This may offer even more proof that long-term investing works, because those investors who attempt to try to time the market would likely miss out on the gains associated with these dividend hikes so shortly after the recession.
10. Last, but certainly not least, the effective tax rate on corporate dividends around the globe is about as wide-ranging a figure as you'll find anywhere. Among G-10 countries, Japan offers the lowest dividend tax rate of just 10%, while France taxes payouts the hardest at roughly 40%. If you're looking for a true dividend safe haven, look no further than Iran. No, your eyes aren't deceiving you, I really did say Iran. Iran does not tax dividend income, and only within the past three years began taxing capital gains.
