Finance
Over the last several years, dividend stocks have become an important tool that is helping investors to realize above average returns. According to Paul (2012), these areas have been accounting for 40% of profits on the Dow Jones Industrial Average since 1930. This is because they can provide a number of benefits in assisting investors to realize their long-term objectives with him saying, "Those areas that offer sustainable and growing dividends hedge income streams against inflation, to provide growing income to investors without the need to sell shares and to signify strength to investors. These firms generally exhibit lower stock price volatility, while delivering attractive and even superior returns." This is illustrating how these kinds of securities can provide protection, lower amounts of volatility and higher returns to investors. (Paul, 2012)
In 2012, these returns have been greater for those companies in contrast with growth areas (such as the Russell 2000). The below table is comparing these returns with the dividends that were received from the firms listed on the Dow Jones Industrial Average (which paid dividends).
Russell 2000 Growth Companies vs. The Dividends Paid on the Median Return for Dow Jones Industrial Average Dividend Stocks
Index
2012 Return
Dow Jones Industrial Average Dividend Stocks Performance and Income
10.0%
Russell 2000
9.58%
("Russell,"2012) (Arends, 2012)
These figures are illustrating how the total returns are higher in contrast with companies that are focused on growth (which pay no dividends).
Introduction
A common challenge that all investors will face is finding asset classes that can reduce their risk, increase income and offer capital appreciation. Those companies that are paying dividends are considered to be more established and they have track record of delivering consistent earnings. As a result, the different corporations with the highest yields on Dow Jones Industrial Average include: AT&T, Verizon, Intel, Hewlett Packard, Du Pont and Merck. These firms are paying between: 3.79% to 5.24%. ("Dow Jones Industrial Best Dividend Stocks," 2012) Moreover, they are yielding an average return of 10% for 2012. (Arends, 2012)
When this is compared with other investment classes, these figures are much greater. Evidence of this can be seen in the below table (which is contrasting the average divided growth rate with certificates of deposit and U.S. Treasuries).
Return of Dow Jones Industrial Average Dividend Stocks in Contrast with CDs and U.S. Treasuries
Category
Return
Dow Jones Industrial Average Dividend Stocks
10.0%
CDs
2.35%
US Treasuries
2.68%
Corporate Bonds
4.68%
(Arends, 2012) ("Current Rates," 2012)
These numbers are showing how dividend stocks are providing a larger return in comparison with other asset classes. For investors, this is illustrating how they have fewer opportunities to receive consistent amounts of income without increasing the risks exponentially. To fully understand what is taking place, there will be a focus on: dividend paying firms in comparison with other areas, top performing dividend industries, the weaker dividend sectors and if a bubble is developing in these securities. Together, these elements will highlight if the value of these stocks are inflated in contrast with their fundamentals.
Dividend Paying Stocks in Contrast with Other Popular Investments
The biggest reason why dividend paying stocks have risen in popularity is because interest rates are sitting at historical lows. This is because the economy has been facing considerable challenges and the Federal Reserve is trying to stimulate growth by reducing them to such levels. For investors who are purchasing CDs, this is problematic as they will be unable to receive a positive return (when taxes and inflation are taken into account). (Stein, 2005)
Evidence of this can be seen by looking at the yield on CDs. In 2002, everyone could earn interest of 6.20% on these investments. As the economy collapsed, many of the yields were steadily declining to prevent it from falling into a depression. During this process, is when the total returns in these areas decreased to the point that many investors were realizing negative returns (with them sitting at 2.35%). (Stein, 2005) ("Current Rates," 2012)
For retires and individuals that wanted to have increased amounts of income, they began to invest in Dow stocks (which paid more than what they were receiving in CDs). This meant that their focus shifted from purchasing these areas to those companies which could offer higher yields and growth. Evidence of this can be seen with observations from Carrel (2010). He found that there are several major advantages of investing in dividend stocks to include: passive income, improved total returns, reduced risks (from purchasing more stable companies) and continued ownership while collecting profits. This is significant, in illustrating how this asset class has become more popular based upon: the low interest rates, reduced risk and the ability to realize a larger return. As a result, investors have been focused on locating assets classes that can provide them greater returns without increasing the overall amounts of risk. Dividend stocks are one of the highest yielding areas that can achieve these objectives. (Carrel, 2010) (Stein, 2005)
At the same time, the yield on U.S. Treasuries is sitting at 2.68% and investment grade corporate bonds are 4.68%. In the case of U.S. Treasuries, these amounts are similar to what is provided with CDs. This means that investors will receive negative returns in this asset...
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