In recent years, many investors have shunned dividend stocks, figuring income-oriented investments tend to be slow growers. But dividend stocks have outperformed stocks that pay no dividends, Matt says. Over the past 20 years, the dividend payers of the S&P 500 have returned 9.6 percent annually. The S&P 500 as a whole — which includes dividend and nondividend payers — returned 7.7 percent.
Many investors have passed up dividend payers in favor of companies that use their cash to repurchase shares, Matt says. When companies buy back stock, they lower the number of shares outstanding. That increases earnings per share — and sometimes helps to boost stock prices. But S&P 500 companies with buybacks only returned 8.6 percent annually during the past two decades, lagging dividend stocks.
Part of the problem with buybacks is that companies overpay for their stock, Matt says. S&P 500 companies spent $600 billion on buybacks in 2007, a year stocks were peaking. But the companies spent only $130 billion on buybacks last year, when share prices were lower.
Company executives tend to buy back shares during periods when cash is plentiful — but that is when stock prices are high, Matt says. Instead of spending on high-priced shares, companies would produce better rewards for shareholders by boosting dividends.
"A stock might get a pop for the first six months after you announce a buyback, but you get better long-term results by paying dividends," Matt says.
Some Wall Street analysts worry that Congress is likely to raise taxes on dividends next year. That could erode dividend income and depress share prices. Cohen said the impact of the tax increases could be less than what some analysts fear. He says Automatic Data Processing and other companies are planning to raise their dividends to compensate shareholders for the extra tax burden.
"ADP has said that they are going to raise the dividend," Cohen says. "They can afford it, and they know that shareholders want the dividend income."
______________________________
Disclosures:
Disclosure information was not available for Luxenberg or his company.
Disclaimer