Barron’s on Dividends

The Barron’s cover story was about seeking a 4% yield from stocks. It was a broad look across many sectors in the S&P 500 at stocks that have the room to increase their dividends substantially or in some cases initiate a substantial dividend.

My take on dividends has been consistent; they are crucial to long term portfolio success but I do not believe in owning high yielders or dividend growers exclusively. There was one point made early in the article that I think needs to be dissected because I think it distorts how markets tend to work.

During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011—all with 4%-plus yields—returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates.

Further down in the article is a table that notes the performance of each of the sectors in 2011. Utilities did the best at 14.8% followed by staples at 10.5% and healthcare at 10.2%. While there can be no absolutes it is a good bet that in a year where the S&P 500 is flat, and some might say it was lucky to have been flat, it is going to be the defensive sectors that do better.

Things like utilities, healthcare and staples do better in years like 2011 for two reasons; the dividends of course and more fundamentally the steadiness of the demand for the products.

So far in 2012 the S&P 500 is up 4.58% which is pretty good for three weeks. In that same three weeks utilities are down 3.8%, healthcare is up 3.3% and staples are down 0.2%. Again, there are no absolutes but if 2012 is somehow a repeat of 2009 then these three sectors will very likely lag and the dividends won’t mean much as was the case in 2009. Of course 2008 was a terrible year for stocks and all three of the dividend sectors mentioned above outperformed.

For the long term there is no question in my mind that dividends are crucial but the assertion that dividend stocks will have a good year in 2012 because…is simply the wrong way to frame this. The other day I mentioned about the importance of thinking in long term increments like complete stock market cycles or even decade long chunks. The importance of the yield of the portfolio can be better understood in those time frames. In one year time frames the more correct framing is that in a great year for stocks dividend payers will usually lag.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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