Cautious investors drawn to dividends

By Karl Henkel

khenkel@vindy.com

YOUNGSTOWN

Jim Senary has invested for long-term, home-run stock growth plenty throughout his lifetime.

But today, the 57-year-old former Delphi Corp. financial analyst is opting for a safer, more conservative approach with his investment dollars.

Even with the stock market as volatile as it’s ever been — and many analysts said it’s simply because of fear-stricken media consumers — investors feel as if the stock market is too risky a play. But Senary, like many other investors, puts his money in companies that offer high-yield dividends, whether they come in monthly, semi-annual or annual dividend payments.

“I came to the realization that I’m at the age where I’m going to have to rely on a steady cash flow,” Senary said. “A sure dividend is more important than the growth of the stock.”

In the past 80 years, dividends have accounted for approximately 40 percent of the S&P 500’s total returns, according to Thornburg Investment Management. That’s a statistic that Robert Gardner, CPA and financial adviser with Stifel, Nicolaus & Co. Inc., Butler Wick Division in Canfield, Senary’s adviser, says is often overlooked during bull markets.

“Dividends have a greater appeal in slow-growth environments,” he said. “We basically look to grow our wealth in stocks by appreciation of shares and dividends. As significant appreciation from here is being debated, especially lately, dividends have been gaining attention.”

Dividend yields are calculated by dividing the annual dividend per share by the current share price.

Gardner said that as the baby-boomer generation begins to retire, those individuals seek, but have trouble finding, a sufficient source of income from less volatile, lower-return investments such as CDs, corporate bonds and U.S. treasuries.

“Dividend-payers tend to be the more mature, established companies that have weathered various economic storms and have maintained their payouts,” he said.

But that hasn’t deterred conservative-style investors, most of them older, who choose a “growth and income” style of investing, Gardner said, even if they have no immediate income need.

“A lot of people are looking to retire,” said Brian Laraway, financial adviser at Bury Financial Group in Poland. “They’re using dividends to help bridge their gap from their pension and Social Security. It’s some spending money.”

The dividend-seeking approach is also more popular today, including among younger investors, because of lower tax rates. The government used to tax dividends as ordinary income; dividends are now taxed at the capital-gain rate.

Congress recently extended the lower capital gains and dividend tax rates through the end of next year. The long-term maximum capital gain rate is 15 percent for assets owned for more than one year. Investors in the 10 percent or 15 percent marginal income-tax brackets will pay no tax on gains or qualified dividends.

Though dividends themselves may seem like a fiscally conservative approach to investing, not every company pays out dividends, and not every company pays out worthwhile dividends.

Gardner said dividend yields are commonly in the 2.5 percent to 3.5 percent range, but some can reach as high as 6 percent.

“You can’t deny there are certain sectors that pay dividends,” said Laraway, who cited the utilities, financial, energy and health-care sectors as some that do.

“You don’t see a lot of tech companies that pay dividends.”

Reynolds American Inc., one of America’s largest tobacco companies (with products such as Camel, Pall Mall, Kool and Kodiak), has a divided yield of 5.93 percent — and that’s in addition to the near-13 percent market gain since the beginning of 2011.

Verizon Communications is another company with a better-than-average dividend yield. Even with a less than 1-percent market return so far this year, it still has a dividend yield of 5.6 percent.

Laraway said that dividend-seeking isn’t all about high-yield returns, either; it’s also about the consistency and longevity of dividend payments.

Senary said the same thing and cited Countrywide as an instance of high-yield dividends that eventually disappeared.

“When you’re looking at the dividend aspect, you have to look at the overall company,” he said.

Global pharmaceutical company Eli Lilly and Co. has given out 10 dividends over the last decade. Coke has a modest 2.8 percent dividend but has shelled it out for nearly a half-century and increased it multiple times.

If it’s not for the consistent returns, it’s also for the peace of mind, and investors aren’t giving up too much.

“Considering the role that dividends have played in total return of the market, I don’t feel such investors are sacrificing the potential for attractive long-term market gains when compared with pure-growth investors,” Gardner said. “And it may be a smoother ride.”