In the boom days before the credit crisis, recession and general market uncertainty, many claimed the dividend was dead. After all, who cares about a 6% annual dividend when your stocks are making 25% to 50% gains a year?
That changed, and an extra 6% in reliable cash became a necessity, but companies were cutting dividends to make up for lost revenues. We’ve now come full circle, and with the indexes up 70% from their 2009 lows, the question has become: What place does a dividend have in your portfolio?
To start, just because a company pays a dividend doesn’t make it a great investment. I know a 12% dividend can seem like the perfect payday, but it isn’t so. Dividend yields are calculated by taking the dividend payment and dividing by the share price. So when the share price goes down, the yield rises.
A high yield can be a sign that the company is in trouble and won’t be able to keep its dividend intact, which means it will likely cut its payments.
More than yield, you want to look at the company as a whole and the history of dividend payments. If a company has consistently made its dividend payments for years and has steadily raised those payments, you have a better bet of finding a strong company with a dividend you can bank on.
Let’s look at a real-life example:
H.J. Heinz (NYSE: HNZ) has been one of my favorite Blue Chip Growth stocks. This is a well-known company (I’m sure you have had their ketchup in your refrigerator) that has paid a reliable dividend since 1997. You can check out their full dividend history at the company website here, but I’ve pulled the last few years of data for you:
|Dividend Payable||Amount||Dividend Payable||Amount|
As you can see, the company has raised its cash dividend amount each year since 2005. This is exactly what you want to see when you’re looking for solid dividend-payers that will provide reliable cash infusions to your portfolio.
If you had invested $5,000 in this company in April of 2005, your 165 shares would have given you over $1,400 in dividends over that time. Including dividends, your total portfolio would have gained 64%, or $3,224.
From this example you can see that there is no reason to discount dividend-payers. These companies can boost your returns and, if you’re in retirement and need investments that generate income for your living expenses, this is a great way to go. Just make sure that you’re not only investing for the dividend, but also capital for appreciation (the profits that come from a rising stock price).
The key takeaway is to not chase yields, but instead to focus on fundamentally sound companies with a history of steadily increasing dividend payments. If you keep this guideline in mind, dividend-payers will play a valuable role in your portfolio.
As of this writing, Louis Navellier was recommending HNZ in his Blue Chip Growth newsletter.