I’ve noticed that a lot more people I speak with lately are less inclined to talk about the stock market and their investments. It used to be that everyone wanted to talk about their equity portfolio. Things changed a lot after the stock market bubble burst in 2000. Then, the seven-year recovery was promptly killed by the subprime mortgage debacle.
In terms of speculating in equities, a lot less individuals are participating at this time. What I do hear people talking about is their desire for more income from their investments. Bonds and money market funds don’t pay very much and neither does gold or cash in the bank. What I’m noticing on the part of individuals is a greater desire to own dividend-paying equity securities. The age of austerity certainly applies to the investment business as well and Warren Buffett would be pleased.
In the current bear market rally, there have been some tremendous performances by some brand-name companies you know. Not only have stocks like PepsiCo, Inc. (NYSE/PEP), DuPont (NYSE/DD) and ConocoPhillips (NYSE/COP) appreciated significantly in value this year, they all pay considerable dividends to shareholders. When you add in the dividends paid by these kinds of companies, the returns have been just as good as or better than what we would traditionally expect from a fast-growing tech stock.
Owning the right stocks at the right time is always the name of the game in equities. But, this example serves to illustrate that you can do a real disservice to your portfolio by ignoring big, old companies that pay dividends.
If you’re in the market for dividend income, I think you’d be well-served sticking with those companies with long track records of success on the stock market (steady capital appreciation of the actual stock price) and a history of consistent increases in actual dividends paid out over time. Pull up a 20-year stock chart on PEP or COP and you’ll see the kind of consistent growth I’m talking about. These two in particular reveal a long-term rising stock price and all the while the companies are paying significant dividends to shareholders.
The great thing about dividend income is the manner in which it’s taxed and that fact that you can choose to either take the quarterly cash payment or invest it in more shares of the company. Dividend payments to stockholders are one way the rich get richer. If you own enough shares, that income becomes very significant.