Attention, American corporations.
Want to improve investor confidence and clear the air of the foul stench of accounting scandals and deflated stock prices?
The simple answer: Offer dividends. Or, if you already have dividends, raise them.
Give shareholders something to smile about, a reward that will tide them over until happy days are here again. Yes, I realize that the earnings from which you pay out those dividends may be down this year. But the fact is, most of you never bothered to increase dividends when your earnings were up either.
Investors were brainwashed during the 1990s bull market to believe they no longer needed to worry about dividends because stock prices would keep climbing to the sky. Because they adopted that logic, many aggressive investors now have zilch to show for their glory days.
Looking back in history, the average dividend yield was 4.2 percent in 1926, 3.89 percent in 1945 and 6.7 percent in 1982. Not bad.
In 2002, the average yield, which was 1.39 percent last year, has edged up to 1.5 percent. It hasn’t been as high as 3 percent in a decade. Shame, shame.
“Stocks that pay dividends continue to perform better than those that do not, an historical trend that was interrupted only by the bull market of 1999 and 2000,” said Richard Cripps, chief market strategist with Legg Mason Wood Walker in Baltimore. “You’re really seeing investor pressure on companies to institute dividends.”
The prices of dividend-paying stocks have outgained non-dividend stocks by 5 percent in 2002, with electric utilities especially strong performers, Cripps noted. Cash-generating companies are no longer able to explain away their lack of dividend by saying they’re busily using all that cash to repurchase their stock or to expand their businesses.
“Because sustained capital gains have become more difficult to come by, investors are demanding dividends,” explained Charles Carlson, editor of the “DRIP Investor” newsletter (www.dripinvestor.com)..
In the mid-1990s, even though corporate earnings were rising rapidly, companies were paying out less and less of those earnings in the form of dividends, Carlson noted. Now that’s in the process of changing. Despite the fact companies generally have lower earnings, they must bump up dividends to appease frustrated shareholders.
“People would definitely like some sort of tangible reward for holding shares and they just haven’t been accommodated by companies,” said Arnold Kaufman, editor of Standard & Poor’s “The Outlook” newsletter in New York. Low interest rates take some of the pressure off companies to pay high dividends because there’s less competitive pressure to do so, Kaufman added. Slow-growth businesses typically offer higher dividends, while fast-growing businesses use much of their money to expand. But it’s becoming harder to justify having no dividend at all.
“With all of the scandals going on, a company that’s paying solid dividends that consistently increase every year is looked at as a much more solid company,” said Vern Hayden, certified financial planner with Hayden Financial Group in Westport, Conn. “If companies want to show that they’re trying to get back the confidence of the investor, dividends help immensely.”
When a solid company’s stock price is beaten up, it could be a good time to invest in it for income, Hayden advised.
Tobacco company Philip Morris (MO), which boasts a 4.2 percent dividend yield, and energy firm ExxonMobil (XOM), at 2.2 percent, are recommended by both Carlson and Kaufman.
Other Cripps energy choices are ChevronTexaco (CVX), 3.2 percent, and Kerr-McGee Corp. (KMG), 3 percent.
Among the stocks of financial firms, Bank of America (BAC), with a 3.2 percent yield, is recommended by both Cripps and Kaufman. Wachovia (WB), at 2.5 percent, is another Cripps selection, while Kaufman likes U.S. Bancorp (USB), at 3.3 percent.
From electric utilities, Cripps suggests FPL Group (FPL), 2.3 percent; Scana Corp. (SCG), 4.2 percent; and Wisconsin Energy (WEC), 3.8 percent. Duke Energy (DUK), 3 percent, is a Kaufman pick. With the tendency of utilities to expand their businesses into new areas, study any choice in that field carefully.
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Coca-Cola (KO), with a 1.8 percent yield; aircraft and defense manufacturer Textron (TXT), 2 percent; and medical lab automation firm Beckman Coulter (BEC), 1 percent, are also Cripps picks. In real estate investment trusts, he favors Camden Property Trust (CPT), at 6.9 percent, and Simon Property Group (SPG), at 6.6 percent.