Last week I wrote an article discussing the dividend yields of U.S. and foreign stocks. To quote from that post:

Though it is commendable that U.S. companies are increasing their dividend payouts, they still lag when compared to the payouts of foreign companies. Relative to their overseas peers, U.S. firms hold over one Trillion $ in cash and equivalents on their balance sheets. So much higher payouts are possible.

Today Mr.Barry Ritholtz of The Big Picture blog has a post on dividends quoting a Barron’s piece. From the article:

“The benchmark Standard & Poor’s 500 index has a dividend yield of just 2%, one of the lowest of any major global market. European stocks yield an average of nearly 5%, and even the historically low-yielding Japanese stock market pays 2.5%.

American companies have the wherewithal to raise dividends because profits are at record levels and the payout ratio—the percentage of profits paid out in dividends—is near an all-time low at 28%. It has averaged 40% over the past 20 years.” (emphasis added)

Currently the US tax rates for dividends are very attractive for investors. The maximum tax rates for ordinary and qualified dividends are 35% and 15% respectively. However these rates are set to increase in 2013 unless Congress extends the current lower rates for more years. In 2013, the maximum rates for ordinary and qualified dividends will jump to 36% for investors in the 28% tax bracket and 39.6% for those in the higher brackets respectively.

So understandably some investors are worried about the impact of higher tax rates on dividends. They need not be concerned. History shows that dividend paying stocks have performed relatively well at different tax rates.

The chart below shows the performance of dividend and non-dividend payers in various tax environments since 1972:

Click to enlarge

Source: The case for Large cap dividend paying stocks, Sonia H. Mintun, Ancora Advisors, LLC

From 1972 to 1982, despite the dividend tax rate at 70% dividend payers vastly outperformed non-dividend payers. In other periods also dividend stocks performed well as shown above by the dark blue bars.

In summary, regardless of any changes in the dividend tax rates investors are better to stick with dividend paying stocks for reducing portfolio volatility and higher returns.

Related ETFs:

SPDR S&P 500 ETF (SPY)
iShares Dow Jones Select Dividend ETF (DVY)
SPDR Utilities Select Sector SPDR ETF (XLU)
Vanguard Dividend Appreciation ETF (VIG)

Disclosure: No Positions

Dividend yield should be one of the important factors when selecting a stock for investment. Dividend payments come out of a company’s earnings and is usually a strong barometer of a firm’s financial health. Unlike other metrics cash dividends are not susceptible to accounting or other manipulations. Hence consistent dividend payers and growers are excellent options for investors seeking both growth and income. It is widely known that over the long-term dividend return account for a major portion of the total return of the S&P 500.

From a recent article on dividends in The Wall Street Journal:

Click to enlarge

Looking solely at prices, you’d be left believing small-capitalization stocks vastly outperformed more “sluggish” utilities. Data from FactSet Research Systems show that in the decade through Nov. 30, the iShares Russell 2000 Index exchange-traded fund, which tracks the shares of smaller companies, zipped up 61%, versus a more modest 29% gain for the Utilities Select Sector SPDR.

But that woefully misrepresents the returns of these two investments. When dividends are included, the utilities ETF returned 84% to investors over the same period versus 81% for the small-stock ETF. What’s more, over the period, the value of the Utilities Select Sector fund gyrated much less violently than that of the iShares Russell 2000.

In essence: The utilities fund gave higher returns for less risk. It’s something you’d never know unless you looked at the total-return data.

Source: Price Charts Can Mislead, The Wall Street Journal

A Bloomberg BusinessWeek article also discussed about investors’ preference for dividend paying stocks in the current environment. Last year the S&P 500 was flat based on only prices. However the total return was 2.2% when dividend yield is included. The article also noted this interesting fact:

The 10 highest-yielding stocks in the Dow Jones industrial average as of Jan. 1, 2011—the so-called Dogs of the Dow—returned 17.2 percent, dividends included, over the course of the year, 15 percentage points better than the broad market’s total return.

The article went to add:

In his most recent client letter, fund manager Jeremy Grantham credited his faith in well-capitalized, cash-rich large-cap stocks for the gains in his GMO Quality Fund (GQETX), which ended the year up 12 percent. “We would normally count on winning in this strategy in a big down year,” he wrote, “but in a nearly flat year this difference is a testimonial to how risk-averse investors have been at the U.S. stock level.”

Dividends offer more than safety: With interest rates at record lows, they also are one of the few attractive sources of income. While 10-year Treasury bonds closed the year yielding less than 2 percent, the average dividend yield for stocks in Standard & Poor’s 500-stock index was 2.08 percent at yearend, and the 10 highest yielders in the Dow averaged 3.96 percent. At the top of the list, AT&T (T) yielded 5.8 percent, while No. 10 Kraft (KFT) yielded 3.1 percent. Companies in the S&P 500 will raise dividends by 11.5 percent on average this year, according to a Bloomberg Dividends forecast. “All my high-net-worth clients are looking for nothing more than a stable cash flow,” says Joshua Scheinker, a senior vice-president with brokerage Janney Montgomery Scott. “They want a high-quality portfolio with a focus on ‘income, income, income.’ I will take P&G (PG), 3M (MMM), Pepsi (PEP), AT&T, and Intel (INTC) over fixed income any day.”

Source: Why the Bluest Blue Chips Rule This Market, Bloomberg BusinessWeek

In addition to domestic dividend stocks, long-term investors may also want to hold foreign dividend stocks in their portfolios for diversification. Ten foreign dividend paying stocks that have paid dividends every year since 2001 and in some cases have grown their annual dividend payments are listed below for consideration:

1.Company: Banco Santander – Chile (SAN)
Current Dividend Yield: 4.06%
Sector: Banking
Country: Chile

2.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 4.01%
Sector: Banking
Country: Canada

3.Company:Telefonica SA (TEF)
Current Dividend Yield: 12.25%
Sector: Telecom
Country: Spain

4.Company: Enbridge Inc (ENB)
Current Dividend Yield: 3.08%
Sector:  Natural Gas utility
Country: Canada

5.Company: Administradora de Fondos de Pensiones Provida SA (PVD)
Current Dividend Yield: 9.39%
Sector:Investment Services
Country: Chile

6.Company:British American Tobacco PLC (BTI)
Current Dividend Yield: 4.22%
Sector: Tobacco
Country: UK

7.Company: France Telecom S.A.(FTE)
Current Dividend Yield: 12.29%
Sector: Telecom
Country: France

8.Company: EDP Energias de Portugal SA (EDPFY)
Current Dividend Yield: 8.12%
Sector: Electric Utility
Country: Portugal

9.Company: PetroChina Company Limited (PTR)
Current Dividend Yield: 3.67%
Sector: Oil & Gas Operations
Country: China

10.Company: Empresa Nacional de Electricida (EOC)
Current Dividend Yield: 5.80%
Sector: Electric Utility
Country: Chile

Disclosure: Long RY