The value of dividends in an investment portfolio
The notion of buybacks, which are becoming increasingly popular, as cash rich companies like Berkshire Hathaway struggle with what acquisitions to pour their surplus funds into, always seems to create heated debate. People are often polarized about the reasons for buybacks and their consequences.
However, the issuance of dividends presents another story. For investors, it provides a safe-haven at a time when relatively low yields exist in the bond market. Investors have increasingly turned to dividend-paying stocks to generate income. But, dividends do more than just garner income – when they are reinvested they also contribute to the long term return of a company’s stock.
Best Buy shares are soaring after strong same store sales and as management increased the stock’s dividend by 11 percent. The move marks the sixth consecutive year of dividend increases.
As FOX Business’ Charles Payne points out, “Those higher dividends keep big investors in stocks, especially in names that generate a lot of cash, but suffer stagnant business growth.”
Earlier this week, Home Depot hiked its dividend by a whopping 32 percent. The move most likely helped mitigate a drop in share value after the home improvement company released earnings that missed on both the top and bottom lines.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| T | AT&T INC. | 22.96 | +0.14 | +0.59% |
| BBY | BEST BUY CO. INC. | 87.75 | +1.02 | +1.18% |
| CVX | CHEVRON CORP. | 162.29 | +0.99 | +0.61% |
| KO | THE COCA-COLA CO. | 63.52 | +0.51 | +0.81% |
| HD | THE HOME DEPOT INC. | 406.57 | +6.59 | +1.65% |
On the flip side, Executive Search firm Heidrick & Struggles saw shares soar after it issued its first dividend ever in 11 years.
“Investing solely for dividend yield can secure wealth and provide steady income, but for those looking to create new wealth, it’s not the best route,” the “Making Money with Charles Payne” host said on Wednesday.
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The example are the so-called “dividend aristocrats.” These are companies that have raised their dividend payouts for at least 25 consecutive years. Among the class are AT&T, Chevron and Coca-Cola. But recently, as Payne goes on to note, the top ten yielding names on the list have significantly underperformed the stock market.
Perhaps, the moral of story is, while dividends are a healthy part of an investment portfolio strategy, for larger gains, one needs to own companies that will deliver steady and strong revenue growth.