Five Reasons to Buy Dividend Stocks

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Of all the ratios that are available to evaluate a company, dividend yield is probably one of the best ways to measure the performance of the company. Since dividends have to be paid out of a company’s profits there are not many ways to manipulate this figure unlike others. Any company that does not pay dividends is betting on growth to take the stock price higher. Hence these stocks may not suitable for all investors. If a company’s strategy or idea fails to take off or a competitors appears leading to loss of market share, a company’s stock can get killed. Hence it is always a wise strategy for conservative to look for companies that pay at least some amount of dividends.

While there are plenty of reasons to invest in dividend stocks, the following are five of them: 

  • Dividends give some form of return to a shareholder. This return can be used by the shareholder any way he wants.This freedom does not  come with non-dividend payers.
  • Companies that hoard cash and do not pay dividends hold all the power that technically should be belong to shareholders. For example, a company that pays no dividends and hoards billions dollars of earnings can determine how it wants to spend that money. Case in point is Apple which has literally billions in cash and investors are fighting in vain to get Apple to payout more. Other companies simply squander the money on dubious acquisitions.
  • Dividends paid out to shareholders can be reinvested to boost total returns due to the effect of compounding.
  • Based on the “bird-in-the-hand” theory dividends are preferable to capital gains since the former is certain and the later is uncertain and may or may not occur in the future.
  • Dividend payouts on a regular basis such as quarterly is a great way to generate income from investing in equities. This is highly desired by investors such as senior citizens who need the income for living. Holding even millions of a non-dividend paying stock will not give any periodic income.

The following chart shows the strong performance of five solid dividend-payers since 2000:

Click to enlarge

5-Dividend-Paying-Stocks-Returns

Source: Yahoo Finance

The current dividend yields of the above five stocks are listed below:

1.Company: Kellogg Co (K)
Current Dividend Yield: 2.91%

2.Company: Cullen/Frost Bankers Inc (CFR)
Current Dividend Yield: 3.18%

3.Company: Colgate-Palmolive Co (CL)
Current Dividend Yield: 2.17%

4.Company: 3M Co (MMM)
Current Dividend Yield: 2.45%

5.Company: Southern Co (SO)
Current Dividend Yield: 4.37%

Note: Dividend yields noted are as of Mar 1, 2013

All the stocks yield above 2% in dividends and are very good picks for the long-term.

Disclosure: No Positions

Why Invest In Canadian Dividend Stocks

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Many Canadian companies generally tend to have higher dividend yields than their peers south of the border. For example, the dividend yield of the benchmark S&P/TSX Composite Index was 3.3% at the end of February relative to just 2.5% for the S&P 500 according to FT market data. Since Canada is mostly a natural resources-based economy, Canadian equity markets are home to hundreds of resource firms in the mining and related sectors. Hence when looking for investment opportunities in Canada, it is wise to avoid the speculative plays such as start-up gold miners, oil exploration companies, etc. and instead focus on the well-established dividend paying stocks. The reason for this suggestion is that unlike in the U.S., dividends account for a substantial portion of the total return of Canadian stocks.

The following charts show the significance of dividend returns in the total returns of the S&P/TSX Composite Index:

Dividends-Part-in-Total-Returns-of-Canada-Benchmark-Index

Note: Returns shown above are based on Canadian dollars.

Source: The Role of Dividends in Income Portfolios, Practice Essentials Canada, Indexing 201, S&P Dow Jones Indices

Dividends accounted for about one-third of the total returns of the S&P/TSX Composite Index with price appreciation contributing the remaining two-thirds since 1956 as per the research report by Standard & Poor’s. As the above chart shows, from 1956 to 2012 dividends have made up about an astonishing 38% of the total returns of the S&P/TSX Composite Index.

Ten Canadian stocks trading on the US markets with yields of more than 2% are listed below for consideration:

1.Company: TELUS Corp (TU)
Current Dividend Yield: 3.62%
Sector: Telecom

2.Company: BCE Inc (BCE)
Current Dividend Yield: 5.01%
Sector: Telecom

3.Company: Manulife Financial Corp (MFC)
Current Dividend Yield: 3.49%
Sector: Insurance

4.Company: TransCanada Corp (TRP)
Current Dividend Yield: 3.85%
Sector: Oil & Gas Transportation

5.Company: Enbridge Inc (ENB)
Current Dividend Yield: 2.81%
Sector: Oil & Gas Transportation

6.Company: Bank of Novo Scotia (BNS)
Current Dividend Yield: 3.84%
Sector: Banking

7.Company: Bank of Montreal (BMO)
Current Dividend Yield: 4.62%
Sector: Banking

8.Company: Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.53%
Sector: Banking

9.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 3.95%
Sector: Banking

10.Company: Toronto-Dominion Bank (TD)
Current Dividend Yield: 3.81%
Sector: Banking

Note: Dividend yields noted are as of Mar 1, 2013

It should be noted that Canada gives preferential treatment to stocks held in qualified US retirement accounts such as IRAs with respect to withholding taxes on dividends. Canada does not withhold the usual withholding taxes on dividends from Canadian companies if the stocks are held in these accounts. Hence in addition to high dividend yields offered by Canadian firms, this tax policy provides an added incentive for US investors to invest in Canadian dividend stocks.

Disclosure:  Long all five banks noted above.

Two Ways To Invest in Foreign Financials Without Going Abroad

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One way to invest in foreign financial companies is via their American Depository Receipts if they are listed on the US markets.Recently I came the KBW Global Financials (ex-u.s.) Index created by investment bank Keefe, Bruyette & Woods. The components of the index include some of the major global financials that US investors can access easily thru ADRs.

Definition of the KBW Global Financials (ex-u.s.) Index:

The Index is currently comprised primarily of American depository receipts. The Index is a modified market capitalization weighted index that seeks to reflect the performance of approximately 60 non-U.S. financial companies that are principally engaged in the business of providing financial services and products, including banking, insurance and diversified financial services.

The components of this index at the end of February are listed below with their current dividend yields:

 

Source: KBW

One cannot invest directly in the index. However the PowerShares KBW International Financial Portfolio ETF (KBWX) is based on the KBW Global Financials (ex-u.s.) Index. This ETF has a small asset base of just over $2.4 million and the 12-month yield is 5.15%. The fund was launched in late 2010 and in one year the fund is up by about 27% which is close to the  return of the KBW benchmark index.

Note: Dividend yields noted are as of Mar  1, 2013

Disclosure: Long many companies noted in the table above.

Knowledge is Power: Stock Buybacks, Canadian Banks, Frontier Markets Edition

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Eurozone unemployment hits 11.9%  (BBC)

The Rich 100: Canada’s wealthiest people (Canadian Business)

In-App Buying: Don’t Let Your Kids Make Apple Rich (Bloomberg)

Exploring the next frontier: A review of frontier equity markets (Vanguard)

Does Supporting Passenger Railways Reduce Road Traffic Externalities? (Vox)

Canadian banks’ last hurrah? Payouts to shrink as economy sputters (Financial Post)

How the world wide web was won (OECD Observer)

Aberdeen: Emerging market trackers are “absurd” (FE Trustnet)

Buybacks are wrong in principle (Business Line)

Challenges for Italy’s next PM in 10 charts (part 1)

Challenges for Italy’s next PM in 10 charts (part 2) (FT Data blog)

Click to enlarge

insel01 010100_27g

Cafe Insel on Mur river, Graz, Austria

Photo Courtesy: Pixdaus

The Top Holders of Gold

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Many Central Banks were the sellers of gold from 2002 to 2009 during which time gold prices rose steadily.As they sold, private investors have been the net accumulators of gold many via the ETF route. As a result, currently ETFs hold more than 2,500 metric tons of the stuff approaching the holdings of the mighty IMF. The top holders of gold are shown in the chart below:

Click to enlarge

Top-Gold-Holders

Source: Why Gold’s Lustre Will Fade (In Focus) (Feb 21 2013). CIBC World Markets

It is indeed interesting to see how much gold ETFs have become popular with the investing public.

SPDR® Gold Shares (GLD) is the largest gold ETF in the world. It was listed first on the NYSE in November 2004. According to the provider’s site:

SPDR® Gold Shares is the largest physically backed gold exchange traded fund (ETF) in the world. SPDR® Gold Shares also trade on the Singapore Stock Exchange as well as the Tokyo Stock Exchange and the Stock Exchange of Hong Kong.

As of today, the trust holds 1,53.88 tons of gold worth over an astonishing $63.0 billion.Here is the long-term return of this ETF:

GLD-ETF

Source: Yahoo Finance

Disclosure: No Positions