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How Dividends Change the Game for General Electric Stock

By Anders Bylund - Sep 6, 2013 at 1:04PM

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General Electric offers a generous-looking dividend yield, but it comes with lots of caveats.

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Industrial all-arounder General Electric (GE 2.74%) is a curious case of dividend value. The stock combines a brutally low rate of dividend growth with equally disappointing share-price growth, which makes for a juicy dividend yield but terrible total returns.

GE slashed its dividends by the knees in 2009 as a reaction to the panic of 2008. The company is boosting its payouts in the post-crisis era, but it will take several more years to reach 2008's record levels again.

GE Dividend Chart

GE Dividend data by YCharts.

All told, GE has offered one of the slowest 10-year dividend growth trends among the 30 Dow Jones (^DJI 0.52%) components. Only three stocks lag behind GE in this regard. The megabanks on the index, Bank of America (BAC 0.22%) and JPMorgan Chase (JPM 0.19%), have been forced to hold their dividends extremely low by FCC rules meant to prevent another financial disaster. JPMorgan is raising its payouts once again, but Bank of America isn't even asking for permission yet. Aluminum producer Alcoa (AA) suffered financial trauma from the same 2008 panic and has been slow to recover. The company depends on healthy financial markets to drive its customers' large construction projects, making Alcoa a proxy of sorts to the banking sector.

All of these stocks, GE included, have plenty of reason not to boost their dividends through the roof. Don't forget that GE also runs a large financial arm that is the company's largest and most profitable division. It's a bank stock for investors who don't like bank stocks.

GE's yield always seems to hover just north of 3%, which is above the Dow's average yield of 2.6%. But share prices have lagged the overall market for many years, and the dividend checks aren't enough to make up for the difference. GE investors trail behind the Dow even with their dividend checks reinvested:

GE Chart

GE data by YCharts.

However, past performance (or the lack thereof) is no guarantee of future returns. GE has plenty of headroom to increase its dividend payouts and should do so in the next few years. Still, looking at these charts hardly inspires confidence in GE's income-generation prowess. I'd advise dividend investors to put GE on the back burner for now. The company is simplifying its operations, which might lead to stronger bottom-line results and more generous dividends as the plan works out. Just add GE to your Foolish watchlist and keep an eye on that situation.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. Motley Fool newsletter services have recommended buying shares of Bank of America. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$32,973.26 (0.52%) $162.76
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$34.03 (0.22%) $0.07
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$115.97 (0.19%) $0.21
General Electric Company Stock Quote
General Electric Company
GE
$76.40 (2.74%) $2.04
Alcoa Inc. Stock Quote
Alcoa Inc.
AA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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