The Importance of Dividends and Dividend Growth
FAI Equity Investing – The Importance of Dividends and Dividend Growth
We have received several inquiries from clients concerning our equities and specifically dividend paying securities driven by concerns over rising tax rates on dividend payments. Because of this heightened interest, we wanted to share with you some thoughts on our equity portfolio and the dividend income that it produces. Imbedded in FAI’s equity investment process is our preference for dividend paying stocks. The reason for this can be seen from history of the returns for the S&P 500 over the past 80 years. As shown in the chart below, dividends have comprised almost half of the S&P 500’s total return over the past 80 years.
So, dividends are an important part of the equation when discussing returns from our equity portfolio. However, although we prefer dividend paying stocks, absolute yield for most companies is not the most important part of the investment thesis. Our focus is not only on dividend paying stocks, but on companies that also have the ability to either grow that dividend over time or complement their dividend policy with share repurchases. As an example, we currently own 18 stocks in the Core profile. All but one of those stocks pays a dividend. The dividend on these securities is only a by -product of the investment thesis, mainly financial strength and cash flow growth. Of the 17 stocks that pay dividends, only 1 has not increased their dividend over the past year. This calculates to 94% of our companies increasing the dividend over the past year versus 58% of the S&P 500.
Our companies have not only increased their dividends by 21% on average over the past year (vs. 15% for the S&P 500), our group of companies increased their dividend by 8% in 2010 while the average S&P 500 company’s dividend declined by 16%. This supports our investment view that the companies that we own are growing faster than the market and support much better financials and cash flows than the average S&P 500 company over a business cycle.
Our portfolios concentrate on dividend growth because it has proven to be very important to overall stock price performance over time. (Please See Chart Below)
Next, our companies have also been very active in returning cash to shareholders through share repurchases. 13 of our 18 companies have repurchased shares over the past 12 months (72% of our stocks) and have reduced the shares outstanding by an average of almost 2%. The average S&P 500 company has only reduced shares outstanding by 1% over this same time frame. Finally, even though our equity securities are giving back more of their cash flows via share repurchases, and growing their dividend payments faster than the S&P 500, our companies are still supporting significantly better dividend yields than the market.
*Core Portfolio is Historical representation of Yield using current equity holdings The data implies is that our equity securities are in a much better financial position than the rest of the S&P 500. This is true not only on an absolute basis, but also on their ability to grow. We realize that the recent discussions in the government concerning taxes on dividend income will probably drive taxes higher than where they are today. However, we believe that our equity investments are some of the best positioned to continue to deliver better financial results and growth than the S&P 500. Our investments should be able to leverage this strength to benefit shareholders in the most tax efficient manner including a beneficial mix of dividends and share repurchases over the next several years.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FAI Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from FAI Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. FAI Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of FAI Wealth Management's current written disclosure statement discussing our advisory services and fees is available for review upon request.