Issue 9 • January 29, 2009

Why Dividends Matter

A few days ago an article in Bloomberg caught my attention... it includes more sobering news for investors in today’s drastically altered financial environment.

According to the article, “U.S. companies are reducing dividends at the fastest rate in half a century.¹” This is putting the “squeeze” on investors, many of whom depend on regular dividend income as an important part of their investment return.

In fact, so far in January alone, five blue-chip companies in the S&P 500 Index have sliced their dividend payments by a total of $7.5 billion. That’s more than ALL of the dividend cuts made by EVERY S&P 500 company between 2003 and 2007 COMBINED!²

Of course, the worst financial crisis since the Great Depression has hit the financial sector particularly hard. In fact, more than 90% of all dividend cuts in 2008 came from financial companies slashing their payouts amid mounting losses.³

But with corporate profits plunging 38% last year, an increasing number of firms outside the financial sector are considering dividend cuts to help conserve cash in a worsening economy.⁴

Now, investors in search of stable dividend income must be more selective than ever in terms of which stocks to hold in today’s market.

Dividends Important to Investors Again

Dividend income is likely to become an even more important part of investor’s total returns in the years ahead especially in light of the fact that the other component of stock market returns – capital appreciation – has been dragging down returns recently.

Consider this: Since 1931, cash dividends paid to stockholders have accounted for nearly 40% of the total return for the S&P 500 Index. During the Great Depression in the 1930s, dividend yields accounted for ALL of the return to stock investors, since price appreciation was negative from 1931–1939.⁵

When share prices soared during the 1980s and 1990s, dividends fell out of favor, with investors seeking capital gains over income. During the 1990s, the dividend yield on the S&P 500 Index averaged just 2.4% a year. Dividend income just didn’t matter that much when share prices were soaring at 15.3% per year, on average.⁶

But investors have seen a dramatic reversal of fortune in recent years. You might call it a return to “Depression era investing.”

Since 2000, investors in the S&P 500 Index have LOST about 5.25% per year, on average⁷, if measured on a price appreciation basis alone...or price DEPRECIATION, as it were.

Once again, during this period (2000-present), dividend income has made a big difference.  Now, when you include the returns from dividends reinvested at a modest 3%, investors in the S&P 500 Index only lost about 3% per year since 2000.⁸

In other words, a dividend yield of roughly 2% annually from S&P 500 companies has been the ONLY positive return for investors over the past decade so far.

Stocks Yield More than Bonds: A First Since the 1950s

Even with recent dividend cuts, the dividend yield on the S&P 500 Index today stands at about 3.4% – that’s the highest level in almost 20 years. It’s also significantly higher than the yield on the benchmark 10-year Treasury bond (2.6%)… for the first time since the 1950s!⁹

Given this dramatically changing environment for stock ownership, at Weiss Capital Management, we believe that investors with a longer-term time horizon may be well served by adding dividend-paying stocks to their portfolios. In a declining market environment, as we have seen so far this decade, we expect that dividend income will once again rise in importance to investors.

Importantly, selectivity is the key. Plenty of blue-chip companies have slashed their dividend payouts in recent months. Case in point: Citigroup, which now pays just one-penny a share in dividends.  So you’ve got to do your homework carefully, and build a diversified portfolio of established, high-quality companies.

Look first for a strong balance sheet that can weather this storm. Pay special attention to debt-to-equity ratios and liquidity ratios – key indicators of a firm’s ability to survive tough economic conditions. Next, look for a strong history of paying consistent cash dividends.

As you can imagine, we are finding more and more of these outstanding values at today’s reduced prices. Plus, the dividend income many of these quality stocks provide is particularly attractive today: paying you much more than any money market fund or certificate of deposit.

Given our belief that market returns may be more modest in the future, a focus on high-quality dividend paying stocks could prove very rewarding. Our Weiss Balanced Program is a managed account strategy we offer that invests primarily in a diversified portfolio of dividend-paying common stocks of companies we believe to be high quality, and attractively priced.

To learn more about the Weiss Balanced Program or to receive our special report "Dividends Pay Off: A Tried and True Strategy for the 21st Century Investor” please visit our Website: www.WeissCM.com.

Good investing,

Mike Burnick
Director of Research & Client Communications
Weiss Capital Management, Inc.

P.S. For even more details on the Weiss Balanced Program, and to hear our investment team discuss other strategies for these turbulent times, listen-in to our FREE video on-demand: Crisis Consequences & Opportunities webinar NOW!

¹ Bloomberg news: “Companies Slash Dividends at Fastest Rate in 53 Years” 1/23/09
² Ibid
³ Ibid
⁴ Ibid
⁵ Weiss Capital Management: “Dividends Pay Off: A Tried and True Strategy for the 21st Century Investor” December 2006
⁶ Ibid
⁷ Bloomberg data: 1/27/09
⁸ Ibid
⁹ Ibid