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Are You Missing Out on Dividends?

http://www.fool.com/investing/dividends-income/2010/06/28/are-you-missing-out-on-dividends.aspx

Matt Koppenheffer
June 28, 2010

"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%