Reasons to invest in dividend-paying stocks

There are a number of compelling reasons to invest in dividend-paying stocks today. Consider this:

• US stocks offer income that rivals or outstrips that of traditional fixed income investments today, while also providing capital appreciation potential not available from bonds.
• Dividend-paying companies in the S&P 500 historically have outperformed non-dividend payers and the broader market over the long term, with lower volatility.
• While the highest-yielding stocks have been overbought and are expensive, high-quality companies with track records of growing their dividends are still available at reasonable prices.

Besting Bonds - For yield-seeking investors, the traditional sources of income simply are not making the grade today. US Treasury yields are at all-time lows. A 10-year Treasury, with a yield of 1.70% on September 11, will leave an investor with a flat to negative return after factoring in the current inflation rate of 1.70%. Stocks can offer a much better proposition.

Of the top 50 stocks in the S&P 500, 39 offer a higher current yield than the 10-year Treasury. And many more company's stocks are providing yields greater than the same company’s bonds. While future dividends cannot be assured, stocks also offer the potential of income growth over time, where bond coupons are fixed throughout the life of the bond.

Proof in the Performance - According to a study from the French bank Societe Generale, dividend growth was the single-largest contributor to investment returns across modern economies over the past 40 years, providing more return than capital appreciation. As a result, dividend-paying stocks have outperformed non-dividend payers — and the broader stock market — over the long term. Through the power of compounding, the benefits of dividend yield and dividend growth become increasingly pronounced over time.

It is also worth noting that, in down markets, stocks that pay dividends have gone down, on average, about half as much as those that do not pay dividends.  Dividend payers historically have outperformed in bull markets as well, affording investors an average of 3% more per year during the last 10 US bull markets.

Quality Matters - Not only have dividend stocks provided relative outperformance over the long-term, but they have done so with less volatility. This is because companies that pay and grow dividends typically are of high quality. They have better business models, stronger balance sheets and a higher degree of confidence in their growth capabilities. These characteristics historically have helped these stocks outperform in difficult and volatile times.


Source:  Robert Shearer, BlackRock

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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