If you're a dividend investor as we head into 2017, or you're considering becoming one, there are some things you ought to know that can strengthen your conviction. Dividend stocks are terrific ways to build your wealth, so be sure to give them plenty of consideration -- and perhaps plenty of your investment dollars, too.
Image source: Getty Images.
33%
According to data from the S&P Dow Jones Indices, dividend income made up 33% of the monthly total return of the S&P 500 between 1926 and 2015. In other words, dividend income isn't just a little bit of icing on the stock market-investing cake -- it's a whole third of the cake.
10.4% vs. 8.5%
Researchers Eugene Fama and Kenneth French, studying data from 1927 to 2014, found that dividend payers outperformed non-payers, averaging 10.4% annual growth vs. 8.5%. If you think the difference between an 8.5% growth rate and a 10.4% one isn't that great, check out how an annual $10,000 investment would grow at both rates:
|
Growth Over |
Growing at 8.5% Annually |
Growing at 10.4% Annually |
|---|---|---|
|
10 years |
$161,000 |
$179,400 |
|
20 years |
$524,900 |
$661,800 |
|
30 years |
$1.3 million |
$2.0 million |
Calculations by author.
Less volatility
According to Bob Shearer and Tony DeSpirito of the BlackRock Equity Dividend team, "Dividend payers in the S&P 500 Index historically have outperformed non-dividend payers over the long term with less volatility."
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2.478%
That's where the 10-year Treasury note's yield recently was -- and it was a 17-month high. In other words, bonds are not offering generous interest rates these days, although their rates are generally expected to rise over the coming years. (Rising interest rates can hurt the performance of bond mutual funds, though, as they make new bonds, with higher rates, more attractive than the older ones in the mutual funds.) Compared to such rates, dividends can be rather attractive. They don't offer results guaranteed by the U.S. government, but many dividend-paying companies are solid blue chips unlikely to go out of business anytime soon, and many pay yields well above 2.5%.
3%
The average annual rate of inflation over many decades has been around 3%. If you're earning less than that from your investments -- say, in bonds or money market accounts -- then you're losing ground. Your investment's purchasing power over time is shrinking, not growing. There are many dividends that top 3%, and they're likely to keep your dollars ahead of inflation, especially when coupled with stock-price appreciation and dividend growth.
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50
If you're liking dividend-payers even more than you did a few minutes ago, I have some great news for you. You can invest in them easily via dividend-focused exchange-traded funds (ETFs) and mutual funds. For example, the number above reflects how many dividend-paying companies you'll instantly be invested in if you buy some shares of the PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD +0.26%). The companies include familiar names such as General Motors and GPS specialist Garmin (each recently yielding around 4%) -- and the ETF, which itself recently yielded about 3.5%, sports a low 0.3% expense ratio (annual fee), too.
Image source: Getty Images.
15%
Finally, a word about taxes. Short-term capital gains are currently taxed at your ordinary income tax rate, which is probably 25% or more, and interest from most bonds gets the same rate, too. On the other hand, dividend income from "qualifying" dividends (i.e., from most dividend-paying companies trading on major American exchanges) is currently taxed at 15% for most people.
Which dividend stocks are best for 2017?
There's no way to know which dividend stocks will serve you best in 2017 and beyond. You might look for solid companies with hefty dividend yields, such as the following:
|
Stock |
Recent Dividend Yield |
|---|---|
|
General Electric |
3% |
|
Pfizer |
3.7% |
|
Ford Motor Company |
4.6% |
|
AT&T |
4.8% |
Data source: Yahoo! Finance.
Better still, you might look for solid companies that have been hiking their payouts at a good clip:
|
Stock |
Recent Dividend Yield |
5-Year Avg. Annual Dividend Growth |
|---|---|---|
|
United Parcel Service |
2.6% |
8.5% |
|
Microsoft |
2.5% |
14.3% |
|
V. F. Corp. |
3% |
18.5% |
|
Boeing |
2.8% |
21% |
Data source: Yahoo! Finance.
Be sure to examine many aspects and measures of each company you consider, though. There's more to an investment than its dividend. You want healthy and growing companies, with sustainable competitive advantages (such as economies of scale or strong brands) and attractive valuations. If you find such companies with significant and growing dividends, they stand a good chance of rewarding you richly over the years.
