With all the candy my 5-year-old daughter brings home from the yearly egg hunts, the week after Easter is a dieter's worst nightmare in my home. This year, though, the Easter Bunny has brought a gift to investors that will help you bulk up exactly where you want: in your pocketbook. And it all comes thanks to dividends.
A great quarter for dividends
Hit the rewind button and look back at last year, and you'll realize just how much of an about-face the market has done from 12 months ago. Back then, companies were cutting back on dividends left and right as they tried to conserve precious cash against the possibility of another liquidity crisis. Even healthy businesses hoarded their money as a defensive measure against needing to tap the capital markets at an ill-timed moment, as well as to keep their options open for buyouts and other competitive moves.
Nowadays, the tables have turned. It seems as if nearly every company is rushing to open the floodgates and pay out some of their hard-earned cash to shareholders. Just look at some of the huge dividend increases we've seen just in the past three months:
|
Stock |
Amount of Dividend Increase |
New Dividend Yield |
|---|---|---|
|
Raytheon |
23% |
2.6% |
|
Colgate-Palmolive |
20% |
2.5% |
|
Hasbro |
25% |
2.6% |
|
Family Dollar |
15% |
1.7% |
|
CVS Caremark |
15% |
1.0% |
Source: Yahoo! Finance.
Although a few companies have slashed their dividends during the first few months of 2010, the practice isn't nearly as widespread as it was during the depths of the financial crisis. Moreover, Starbucks
A hint of what's to come
Those healthy dividend raises mean more money in your pocket. But it may well be just the beginning.
Consider: Right now, the dividend yield for the S&P 500 is just 1.8%, down almost half from the 3.4% it paid this time last year. Given that the markets have risen so far from their lows, it makes sense that yields have fallen so far.
Yet as earnings recover, the capacity for companies to pay dividends actually increases, and those earnings have indeed come back substantially. Earnings yields -- basically the inverse of the price-to-earnings ratio -- have risen from around 3.25% last year to nearly 4.4% now, and are forecast to top 6.6% in the next 12 months.
If the portion of profits that companies pay in dividends stays relatively constant, then higher earnings will push yields up. It's quite possible that yields could end up a lot closer to last year's figure above 3% than they are today, making dividend investing even more lucrative.
Where the potential is
Perhaps the biggest future dividend opportunity is in the area where the cuts were the sharpest: the financial industry. Already, murmurs of reinstating dividend increases have come out of General Electric
It's easy to see dividend stocks as boring, especially compared to some of the outsized gains that so many stocks have seen over the past year. Certainly, yields of 3% to 5% aren't raising many eyebrows lately, with double- and triple-digit returns being commonplace.
Over time, though, history has shown that the dividends that these stocks pay out truly add up. In fact, by reinvesting dividends, you can really bulk up your total returns over the years.
Get paid
Investors should be happy that fat payouts are back. After all the difficulties dividend investors faced during the bear market, we're hopefully seeing just the beginning of a new trend that will make your wallet feel a whole lot better.
Many investors have turned to gold during the recent financial turmoil. Fool contributor Adam Wiederman has a better place for your money right now.
