Dividends Are Sexier Than You Think
Last month, the dividend yields on American AAA corporations moved above the yield on 30-year Treasury bonds! That had never happened before.
Even after last week’s stock market rally (which pushed dividend yields lower), the stocks of America’s four AAA companies still yield about 3%, on average, which is not quite as high as the yield on 30-year Treasury bonds, but still much higher than the yield on every Treasury bond of 24 years or less.
So you’ve got an opportunity here to forgo the dubious promise of a bankrupt nation and to invest, instead, in some of the strongest companies on the planet — those that are most capable of expanding, those that are most able to respond to government caprice and move operations wherever they need to move them, those with the most cash on their balance sheets. These are the companies that are going to lead the global economy for the next 10, 20, 30 years.
The story is much the same throughout the developed markets of Europe and North America.
In England, the FTSE index yields almost 4%. Ten-year British government bonds yield less than 3%. In France, The CAC 40 index yields 5.0%. Ten-year French government bonds yield around 3%. In Germany, the DAX yields 4%. German 10-year bonds yield 2%. In the US the S&P 500 dividend yield — at 2.08% — is higher than the 10-year Treasury yield for only the second time since 1958.
In fact, many, many world-leading American companies now pay dividend yields higher than long-dated Treasuries.
As James Grant framed this contrast in the Oct. 7, 2011 edition of Grant’s Interest Rate Observer, “Better the common equity of an adaptive and profitable American enterprise — say, Molson Coors (NYSE: TAP/A) — than the inert emissions of the US Treasury…Today, the stock is quoted at 39… at 11.1 times earnings with the yield of 3.25%. Meanwhile, the utterly unadaptive 10-year note of Timothy Geithner’s negative-cash-flow Treasury is quoted at 1.83% [now 2.03%].”
Grant also highlights Campbell Soup (NYSE:CPB) as a compelling alternative to long-term Treasury securities. At the current quote of $33, Grant observes, this blue chip stock is selling for about 13 times trailing earnings and yielding 3.5%. “Campbell, which traces its corporate ancestry back to 1869 and which incorporated in 1922, early on conceived the bright idea of draining the water from canned soup. The shipping expense thereby saved was enough to allow a price reduction to a dime per can from 30 cents.”
The company has flourished ever since. “From 1955 to the present,” Grant points out, “dividends have grown at an 8.9% compound rate.”
Now, I realize that dividends sound very boring — kind of like watching paint dry… I can almost hear you saying, “C’mon, Addison! This isn’t the Great Depression! I don’t want to invest for dividends, clip bond coupons and store canned peas in my basement. I want something that’s high-growth. Something sexy.”
My answer to that is: Sexy sometimes sneaks up on you.
What if I had told you on Jan. 1, 2000, to sell all your tech stocks — those highflying stocks that were doubling and tripling every few months — and to spread the proceeds equally across three very boring investments: gold, 10-year Treasury bonds and stodgy old dividend-paying stocks — like the ones inside the Vanguard Dividend Growth Fund (VDIGX), the mutual fund we highlighted in Apogee.
You would have looked at me as if I had lost my mind. You might have even felt sorry for me and tried to offer me some intelligent investment advice. But with the benefit of hindsight, we know what happened next.
The high-flying tech stocks that comprised the Nasdaq Composite Index crashed…and still have not recovered their losses, even after all this time. The Nasdaq is down 28% since the end of 1999. Even the “blue chip” S&P 500 stocks are down 15% during that time frame… until you add back those boring dividends.
With dividends included, the S&P 500’s 15% loss flips to a 6% gain. That’s still a miserable return for an entire decade, but it illustrates the point that dividends matter. In fact, for long periods of time in the stock market’s history, dividends have been the only thing that mattered.
Without dividends, the S&P 500 index would have produced a loss for the 25 long years from August 1929 to August 1954. Then again, without dividends, the S&P 500 produced a 5% loss during the 13 years from September 1961 to September 1974. But with dividends included, the S&P’s loss became a 46% gain.
If you think that’s just a bunch of “ancient history”, think again. During the last 12 years — from early November 1999 until this very moment — the S&P 500 has produced a loss…unless you include dividends.
The moral of the story is simple: Dividends matter. In fact, they may even be a little bit sexy. Over the course of the last half-century, dividends have contributed more than half of the stock market’s total return — 56%, to be exact.
So what happened to all that boring stuff you could have purchased at the dawn of the new millennium? Well, the Vanguard Dividend Growth Fund delivered a total return of 50%, 10-year Treasuries produced a total return of 162% and the “barbarous relic” gold provided a dazzling total return of nearly 500%. Average return of the three investments: 236%!
We would expect the Vanguard Dividend Growth Fund to outperform their low-dividend or no-dividend counterparts over the next few years…and to greatly outperform the return of long-term government bonds. As James Grant observes, “Better the common equity of an adaptive and profitable American enterprise than the inert emissions of the US Treasury.”