Over the past few years, growth stocks have been all the rage. Investors unfortunately learned that maintaining a conservative posture at all times might be more profitable in the long run. It has long been conventional wisdom that you can determine a conservative stock by its dividend. Utilities and Real Estate investment Trusts have typically paid high dividends and been more resistant to downturns in bear markets.
A decreasing percentage of public companies pay dividends, which have caused some analysts to ask if dividends still matter. A recent study by AAII Journal (August 2001) shows that dividends do matter—particularly the rate of increase in a stocks dividend. You can see below that those stocks that have increased their dividends the most, have far outpaced those with smaller increases or reductions:
Annual Net Price Changes In Dividend Paying Stocks-NYSE |
|||
Measurement of Dividend Change by Quintile |
Median Price Change |
||
1998 |
1999 |
2000 |
|
Largest % increases |
-0.5 |
-3.6 |
12.7 |
Moderate % increases |
-0.3 |
-8.4 |
11.2 |
Small or no % increases |
-4.9 |
-0.8 |
9.2 |
No change or % decrease |
-9.9 |
-0.1 |
3.3 |
Largest % decreases |
-16.4 |
-0.3 |
-18.1 |
*Note that these results may not hold true in all years and past performance is not a guarantee of future results. Source AAII Journal 7/2001
Furthermore, by comparing the Lipper index for capital appreciation mutual funds (growth funds) to the Equity Income Fund Index (funds holding dividend paying stocks), we find that for the last 20 years ended 12/31/00, the income oriented index “won” 11 of the 20 years. And most importantly for retirees, dividend stocks held their value quite well with the market downturn in 2000. The median price of NYSE companies paying dividends gained 9.2% in 2000 while those not paying dividends generated a median loss of 5.8%.
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