Choppy markets highlight the importance of owning
dividend-paying investments that can smooth out volatility.
That is the message that Standard & Poor's in New York is trying to get across as it expands its Dividend Investor Index Series to include markets in Asia, Australia, Europe and Japan, in addition to several emerging markets.
"Dividends are increasingly important during times of market volatility, as they provide a cushion against falling equity prices," Tim Eisenhauer, vice president of strategy indexes at S&P, said in an Oct. 29 statement announcing the expansion. "In addition, Standard & Poor's research has shown that
dividend-paying issues have outperformed non-paying issues more in down markets than in up markets."
For example, the S&P 500 stock index was down 34.19% year-to-date as of last Monday, while the S&P 500 Dividend Aristocrats stock index — part of an index series that focuses on long-term
dividend growth — was down 20.67%.
Dividend-oriented investments can help a portfolio during tough markets, said Tom Roseen, a Denver-based senior analyst with Lipper Inc. of New York.
The Lipper mutual fund category most closely associated with dividends — equity income funds — was down 31.47% year-to-date as of Oct. 30. But U.S. diversified equity funds, of which equity income funds are a part, were down an average of 34.75%.
As a result, Mr. Roseen said, he would be surprised if investors didn't consider
dividend-oriented investments.
Financial advisers don't need convincing.
"We pay huge attention to dividends," said J. Michael Martin, president of Financial Advantage Inc., a Columbia, Md.-based firm with $260 million in assets.
Low returns are expected from markets for some time, and owning a stock that throws off an attractive
dividend is one way to juice returns, he said.
Of course, some of the best-known
dividend-paying stocks — financials, energy and utilities stocks — were some of the hardest-hit during the recent market meltdown.
But their sell-off may have been overdone, said Steven Goldin, S&P's London-based head of strategy and custom indexes for Europe and the Middle East.
PAYING OFF
The data show that over the long term, owning dividend-paying stocks pays off, he said.
From August 1989 to this September, dividends contributed about 28% of the total equity return of the S&P BMI World Index, while price appreciation contributed about 72%, according to an S&P research paper. But from August 1999 to this September, dividend income accounted for as much as 52.05% of the total return.
Owning individual dividend-paying stocks is really the best way to get dividend exposure, Mr. Martin said.
He said that he is only about 19% long stocks, but "we're going to try and gradually increase that over the next couple of years ... mostly by looking at high-dividend-paying stocks," he said.
One of Mr. Martin's recent purchase was Dow Chemical Co. (DOW) of Midland, Mich.
The stock is yielding about 7%, which is much better than what he could have gotten investing in bonds, he said.
Investors can invest in income-oriented mutual funds, but mutual fund fees eat into the income thrown off by the fund, Mr. Martin said.
Closed-end funds, which specialize in providing investors with income, are tempting, he said. But they are currently so illiquid — stemming in part from the issues related to failed auctions of preferred securities — that Mr. Martin said that he is reluctant to buy them.
Investors can also get access to dividends via exchange traded funds.
Barclays Global Investors of San Francisco and Boston-based
State Street Global Advisors both offer ETFs that follow dividend-oriented indexes.
WisdomTree Asset Management Inc. of New York specializes in such ETFs, offering 35 of them.
Such investments are interesting but don't entice Richard Schroeder, executive vice president of Schroeder Braxton & Vogt Inc., an Amherst, N.Y., financial advisory firm with $220 million in assets.
"We think dividends are an important part of the overall return component, but we don't specifically invest for high dividends," he said.
Mr. Schroeder's firm is value- oriented, and such investments tend to throw off greater yields to begin with, he said.
E-mail David Hoffman at [email protected].
