4 Easy Steps to Increase Your Dividend Stock Returns

Corporations worldwide paid $244.7 billion in dividends in the first quarter. This is a record amount, according to the Janus Henderson Global Dividend Index.

This was also a 10% increase over dividends paid in the year-ago quarter.

Stockholders in U.S. companies have been leading beneficiaries of the corporate largesse. They received $113 billion in dividends in the first quarter.

Janus expects global companies to pay 8.5% more in dividends this year than last. They paid $1.252 trillion in dividends in 2017 – a record. The record is sure to be broken this year.

A dividend deluge has arrived. Here’s how you can maximize your returns on the deluge.

Don’t Reach for Yield

Veteran investors will recognize the old Avis rental-car slogan: “When you’re only number two, you try harder.”

Avis was imploring consumers to go with number two – Avis. Do so, and your experience will be all the better. Number two tries harder.

We can apply a similar mindset to high-yield investing: Go with number two.

Wellington Management analyzed dividend-stock performance back to 1929. It found that going with number two is a worthwhile strategy.

The second quintile (the second of five) of dividend stocks, that is. The stocks with dividend yields in the second quintile outperformed the S&P 500 Index eight out of the nine periods from 1929 to 2016.

The second quintile is composed of stocks that pay dividends that yield between 6% to 8%. Equity REITs and business development companies (BDCs) offer the most fertile fields for sustainable 6%-to-8% yields.

Avoid the Stretchers

Investors should avoid reaching for yield. They should avoid companies that reach for yield as well. The “number two” strategy is again number one. The “number two” strategy is preferred with payout ratios.

Wellington Management’s research shows that the first quintile of payout ratios is an average of 70%. These companies pay an average of 70% of their net income to shareholders as dividends.

Less is sometimes more. Less is more with payout ratios. Moderation appears the better strategy.

Ned Davis Research analyzed dividend stocks and found that 57% has been the average payout ratio on the S&P 500 since 1926.

This has been the sweet spot for generating high dividend stock returns. The second quintile outperformed the other quintiles.

The second quintile of payout ratio today, at 46%, is sustainable. What’s more, it has room to expand to the historical average. Number two is again number one.

Incorporate the Growers

If you have time to wait for your dividend stream to rise, then wait with dividend growth.

Ned Davis Research data show that dividend-growth stocks (and dividend initiators) offer the highest dividend stock returns with the lowest volatility. Dividend-growth stocks beat not only other dividend stocks, they beat all stocks.

Dividend-growth stocks produced a 10.1% average annual return from 1972 through 2018. The return was higher than with all dividend payers (9.3%), dividend payers with no change (7.5%), non-dividend payers (2.8%), and dividend cutters (-0.3%).

What’s more, dividend growers produced the highest return with the least volatility. They offer higher returns. Better yet, you get the higher returns without climbing aboard a Six Flags roller coaster.

Consider Reinvesting

If you don’t need your dividends, don’t spend them. Reinvest them.

Albert Einstein putatively said, “Compound interest is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it.”

Einstein might be right: Compounding interest is the world’s eighth wonder. If so, then dividend-growth compounded is the ninth wonder. Morningstar data reveal how the wealth-generating power of reinvesting produces a growing flow of dividends.

Ten-thousand dollars invested in the S&P 500 – an index larded with dividend growers – in 1960 grew to $385,273 by the end of 2016. When dividends were reinvested, the same $10,000 returned $2.1 million. This was more than five times the returns when the dividends weren’t reinvested.

Perhaps you could have invested the S&P 500 dividends in other securities to generate an even higher return. I suspect the odds would be low. To do so would require not only considerable investing acumen, but considerable time and effort. The reinvesting strategy for dividend stock returns requires no investing acumen and no additional time and effort.

Dividend-stock investing is hardly new. The investing strategy surged to prominence in the past decade due record-low interest rates. Dividend-stock investing should maintain its prominence when interest rates are no longer at record lows.

— Steven Mauzy

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Source: Wyatt Investment Research