In a period of slow economic growth, dividends from equity investments are a big deal. In fact, dividends might be the single most important contributor to equity returns over the next several years.
Recently in this column, I wrote about PepsiCo, Inc. (NYSE/PEP) and its excellent long-term track record of wealth creation for shareholders. It takes courage to make a long-term investment in a company. Everyone wants a quick buck from the stock market, but few want to make a real commitment to an investment that might not do much for considerable lengths of time. However, owning the right dividend-paying stocks can prove to be highly profitable and let you sleep comfortably. From my perspective, this combination is really worth it.
Consider ConocoPhillips (NYSE/COP), which is the third largest integrated energy company in the U.S. This stock is down about 10 points from its recent price high due to the recent correction in the price of oil. But, the stock is up approximately 40% since last year, and that’s not including a dividend payment of around five percent. In my book, that’s an amazing investment return from a $100-billion company.
Turning to pharmaceuticals, a company like GlaxoSmithKline (NYSE/GSK) is worth just slightly more than COP and offers a bigger yield. However, this large-cap British company has managed to appreciate just over 25% on the stock market over the last 12 months, not including dividends. By any measure, that’s a solid rate of return from an equity security. And, while the financial markets worried about growth rates and sovereign debt issues, this company just kept on making money for shareholders.
Looking at another industry, there’s Automatic Data Processing, Inc. (NYSE/ADP), which has been in the news a lot lately because of its employment surveys. This company is one of the world’s biggest payroll and human resources administrators. What it says about its business directly relates to the job situation in the U.S. market. Pull up a one-year stock chart on ADP and you’ll notice a nice, solid uptrend in the share price. It’s nothing spectacular, but it has steadily appreciated from the $40.00-per-share level last year to its current value around $53.00 per share. That’s a 33% rate of return, not including dividends, from a company that sells payroll services in a high unemployment environment. In my book, this is an impressive performance.
Like most stocks, large-cap dividend-paying companies have a tendency to appreciate on the stock market in spurts. I love seeing stock charts like ADP’s, but that’s more of a rarity. This is why owning a basket of the right dividend-paying securities can produce above average-investment returns with a much lower risk profile than from the speculative end of the market.
I think blue-chip investing has gotten a bad rap over the last few years. Everyone wants immediate gratification from stocks, but the market doesn’t work that way because business doesn’t work that way. In a slow growth environment, large-cap dividend-paying stocks make a lot of sense. They aren’t as exciting, but that doesn’t really matter if you’re making money.