Why Dividends Are Better Than Bonds
Web Editor, "Mad Money"
The market may be frustrating, even terrifying, for you investors, Cramer said Monday, but it’s still the best place for you to make money. So no matter how dire the situation, even after a crash like we had in 2008, you must stay in the game. And one of the best ways to do that is through dividend-paying stocks.
“When it comes to racking up profits,” said Cramer, “dividends are the single most significant factor out there.”
Between 1926 and now, about 40% of the total return of the S&P 500 came from reinvested dividends, meaning the cash distribution from a particular stock was immediately used to buy more of that stock. Thanks to the power of compound interest, nearly half of the long-term gains from stocks are from dividends.
Most of the time you’ll hear that buying an index fund is the best investment strategy, but that idea has since been proved wrong. Dividends will generate better returns for your portfolio. Jeremy Siegel, a well-regarded economist and noted professor at the Wharton School of the University of Pennsylvania, reviewed all the data between 1957 and 2009 and found that the 100 stocks in the S&P 500 with the highest dividends returned an average of 12.5% a year, almost 2.5% better than the annual return of the index as a whole.
The facts then are apparent: Dividends create wealth. But what other benefits do they offer? How about the fact that they can be raised. And there are companies that have been doing so for half a century. Bonds can’t boast that. Also, as of now, dividends are taxed at a low rate. Plus, dividend stocks offer something called “yield support.” As share prices drop, yields rise, and that attracts new buyers, who in turn put a floor in that falling share price.
Then there’s what Cramer calls “accidental high-yielders.” These are the stocks that wouldn’t ordinarily offer sizable yields but now do because their share prices have been knocked down so far, and they are attractive for two reasons: First, that yield. And second, you can collect gains as the stock rebounds. Emerson Electric yielded as much as 4.1% in November 2008 and then snapped back 18% over the next six months. Honeywell International yielded pretty much the same, 4%, at that time and then soared 47% over the next two months.
How did the S&P 500 perform over that period? Up just 1.4%.
If you don’t yet have any dividend payers in your portfolio, Cramer recommended these companies as a jumping-off point: AT&T , Verizon Communications , Con Ed or Kinder Morgan Energy Partners .
When this story published, Cramer’s charitable trust owned Honeywell International.
Call Cramer: 1-800-743-CNBC
Questions for Cramer? email@example.com
Questions, comments, suggestions for the Mad Money website? firstname.lastname@example.org