Over the last 11 years, the popular stock market averages have produced no gains for investors. Only the right dividend paying stocks helped investors beat the rate of inflation. As the main stock market indices did not return anything during this period, there are lots of examples of conservative, higher dividend paying stocks that have done so. (See Lots Of Companies Doing Well, But the Marketplace Isn’t Listening.) History is not a predictor, but it sure is a useful guide to consider for the future.
In a time of lackluster expectations for economic growth, corporate earnings, and the stock market, figuring out what the best stocks to own (if any) are is a real task. The stock market is so fraught with investment risk due to external shocks that defensive, conservative picks are the way to go if you’re creating a new equity portfolio. And here’s the good news: owning large-cap, dividend paying stocks doesn’t mean you should expect very little in the way of investment returns. History reveals that some of the best wealth-creating assets over the last decade were blue-chip, higher dividend paying stocks of well-known enterprises.
Consider Southern Company (NYSE/SO), which is one of those dividend paying stocks in the utility sector with an outstanding long-term track record of wealth creation for shareholders. This stock has appreciated steadily since the 1980s. On a split-adjusted basis, the stock was trading around $7.50 a share in 1990. It appreciated to $25.00 per share by 2000 and, just this month, the stock hit an all-time record price high of $44.92 per share, all while providing a solid four-percent or higher annual dividend yield to stockholders. And, what’s more; the company’s wealth creation on the stock market was done so in a very steady manner, enabling those who owned the stock to sleep well at night. One thousand shares in Southern Company bought in the early 1990s would be quite a nest egg today and shareholders didn’t need to care what was going on in the rest of the world. Imagine how much greater the nest egg would be if those dividends were automatically reinvested in company shares. This is but one of many great examples of solid, long-term wealth creation on the stock market that significantly outperformed the main stock market averages. Pull up the charts and see for yourself.
I’m not very enthusiastic about the prospects for the stock market over the next several years, but I firmly believe that owning the right dividend paying stocks in this kind of market is the right course of action for equity investors. This isn’t the right strategy for traders/speculators. Higher dividend paying stocks offer the same kind of wealth creation as compound interest; but, today, the bank doesn’t pay you much. In fact, you’re hard pressed to even beat the rate of inflation.
A portfolio of higher dividend paying stocks isn’t the only strategy worth considering going forward; but, with declining expectations around the world, I’d take a solid quarterly dividend from a domestic company over risking whether the eurozone can stay together.