Dividend stocks often form the foundation of every long-term investment and retirement portfolio, and it's not hard to understand why.
To begin with, dividend stocks typically have business models that are time-tested. After all, why would a company be paying a recurring dividend if it didn't believe its business would remain profitable? Thus, seeking out dividend stocks often means looking for profitable, time-tested businesses that'll allow us to sleep better at night.
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Second, buying dividend stocks helps to hedge against the inevitable stock market corrections that pop up from time to time. Since 1950, according to Yardeni Research, the S&P 500 (^GSPC 0.02%) has undergone 35 corrections totaling at least 10%, when rounded to the nearest whole number. That's about one correction of at least 10% every two years. While a dividend payment isn't going to counteract the entirety of a possible move lower in equities, your payout over time will act as a comforting hedge that can calm your nerves.
Finally, dividend stocks allow investors the opportunity to set up a Drip, or a dividend reinvestment plan. The idea of a Drip is that instead of pocketing the income from your dividend, you're repurchasing more shares of stock with the payout, often on a commission-free basis. Doing so, in a recurring pattern, should yield higher payouts, more shares owned, and a quicker pace of wealth creation. Drips are a common way money managers provide healthy returns for their clients.
There's so much more to dividends, however. Here are seven facts about dividends you probably didn't know.
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1. Apple is the dividend kingpin after just five years
Apple (AAPL 1.27%) has only been paying a dividend, following a roughly 17-year hiatus, for the past five years. However, since it began regularly paying a quarterly stipend in August 2012, it's grown into the kingpin of all dividend stocks. Sure, its current dividend yield is only 1.7%, but its quarterly payout has grown by approximately 67% in just five years. Its $0.63-per-share quarterly payout ($2.52 annual) works out to about $13.1 billion being returned to its shareholders via dividends each year. And given its low payout ratio (the percentage of earnings per share it's paying out as a dividend), Apple's dividend is likely to rise even more in the years to come.
2. Aggregate S&P 500 payouts have doubled since the Great Recession
Do you feel like S&P 500 companies are putting more money into your pockets each quarter? You should. According to data from FactSet Research Systems (FDS 0.69%), aggregate dividends paid on a trailing-12-month basis by S&P 500 companies have increased in each and every quarter, save for one, between the first quarter of 2010 and the third quarter of 2016. Not only did these payouts grow each quarter, but the aggregate annual payout to shareholders has virtually doubled to $431 billion in less than seven years' time. During this span, the number of S&P 500 companies paying a dividend also grew from around 365 to 419.
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3. The S&P 500's dividend yield is very low, historically
Yet in spite of this increase in aggregate payout, the S&P 500 has lost a lot of its income punch over the years. After consistently staying above a 3% yield, or higher, through 1990, the S&P 500's current yield sits below 2%. Part of the blame can go to companies utilizing their cash for stock buybacks and merger and acquisition activity instead of dividends. However, the other component at work is the S&P 500's rapid increase in value. Since dividend yield is a function of price, the S&P 500's rapid ascent and recent all-time highs have worked to push its yield lower. Something tells me this is a trade-off that investors will gladly take.
4. Telecom has the highest yield, and consumer discretionary the lowest
If you want the highest-yielding sector within the S&P 500, look no further than telecom, with companies like AT&T and Verizon leading the way. Telecom companies and content providers do deal with relatively high up-front infrastructure costs, but are mostly protected by high barriers to entry and somewhat minimal competition. The result is telecom companies having exceptional margin power and the ability to lock consumers in with contracts. This is why their dividend yields are so high and why the aggregate sector yield through the third quarter of 2016 was 4.5%, more than double the S&P 500, according to FactSet.
On the other hand, consumer discretionary stocks offer the worst yields at 1.4% on aggregate basis as of the third quarter of 2016. Discretionary companies rely on a strong economy to drive dividend growth, but a mixture of weak GDP growth and inflation data, coupled with tepid consumer spending, has kept this from happening in recent years.
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5. Only six companies have raised their payouts for 60 or more straight years
Among the veritable sea of dividend-paying companies lies a small clique of elite payers known as Dividend Aristocrats. A Dividend Aristocrat is a publicly traded company that's increased its payout for a minimum of 25 straight years. Just a couple dozen companies have done so, making it a pretty exclusive club.
However, at the top of the list are six stocks that have raised their payouts for at least 60 straight years:
- American States Water
- Northwest Natural Gas
- Dover Corp.
- Procter & Gamble
- Emerson Electric
- Genuine Parts Company
You'll note that most of these companies supply a basic need, and thus inelastic, good or service, which is why their pricing power remains strong and why they've been able to thrive in both booming and recessionary economies.
6. York Water has paid out an annual dividend for more than 200 years
Apple may be the dividend kingpin in terms of aggregate annual payout, but no public company can rival York Water (YORW -0.06%), which has paid an uninterrupted dividend since 1816. This little-known water and sewer utility relies on the fact that water and sewer service are inelastic. If you live in a home, condo, or apartment, you need water and sewer service.
Furthermore, York's business is regulated, which means it's not exposed to wholesale pricing fluctuations. The result is a company with exceptionally predictable growth and cash flow and thus a healthy dividend.
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7. Activists calling for increased shareholder distributions had their worst year in a decade in 2016
Last, but not least, according to data from FactSet, the number of successful activist campaigns within the S&P 500 that were aiming for an increase in shareholders returns via stock buybacks and dividends hit a 10-year low in 2016 (at least through third-quarter 2016). Just 10 of the nearly 40 activist campaigns were successful, which compares to nearly 40 successful campaigns in just over 70 attempts in 2015. It's unclear whether companies are getting better at thwarting the demands of activist investors, or if they're finding more effective uses of capital than shareholder returns at this point.
As you can see, dividend stocks can tell a story. What tales might your portfolio have in store?
