Finding Yield in a Low-Rate Environment with Dividend-Paying Stocks - Where do you go to find yield in today’s low-rate environment? Think dividends. A growing number of companies pay dividends and offer attractive yields.
Finding Yield in a Low-Rate Environment with Dividend-Paying Stocks
Where do you go to find yield in today’s low-rate environment? Think dividends. A growing number of companies pay dividends and offer attractive yields.
Courtesy of: Jared O’Roak
Portfolio Manager, Financial Advisor
Morgan Stanley Wealth Management
For today’s income-oriented investor, it’s been a frustrating time. Yields on US Treasury bonds, as well as investment-grade municipal and corporate bonds have hovered near historical lows. Even longer-term issues remain in the doldrums; rates on 30-year Treasuries have not topped 4% since October 2008.1
But for investors seeking income, there is an alternative: dividend-paying stocks. There are now 395 companies in the S&P 500 that pay dividends, and the average yield on these stocks has been rising since 2000. As of April 30, 2013, the average yield of a dividend-paying stock in the S&P 500 was 2.0%, compared with 1.7% for 10-year US Treasuries.1
But there’s more to dividend-paying stocks than yield. The long-term benefits of dividends are significant:
• Dividends are a key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.
• Dividends help boost returns in down markets. Since 1926, dividends have accounted for over a third of the returns of the S&P 500. In down years, when price return is negative, dividends help offset the drop. Since 1926, dividends have provided an average return of 3.8% in all 12-month periods where the index declined, which helped offset the average price decline of 14.8%.1
• Dividend-paying stocks offer potentially stronger returns and lower volatility. Dividend-paying stocks have outperformed the broader market over time. Stocks with a history of increasing their dividend each year have produced higher returns with lower risk than non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats--those stocks within the S&P 500 that have increased their dividends each year for the past 25 years--produced annualized returns of 11.78% versus 8.98% for the S&P 500 overall, with less volatility, as measured by standard deviation (13.86% versus 14.97%, respectively).2
• Dividends benefit from continued favorable tax treatment. The extension of many of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill passed in early 2013 extended the 15% tax on qualifying dividends and other forms of investment income to those earning under $450,000 (married filing jointly or $400,000 if single) per year in 2013. For those earning above this threshold, a 20% rate applies. Because there are restrictions on the types of dividend income subject to the lower rates, investors should consult a tax advisor to determine how tax laws apply to their situation.
• Dividends are a sign of corporate financial health. Dividend payouts are often indicative of a company's financial health and management’s confidence in future cash flow. They are usually paid by mature businesses, and communicate a positive message to investors who perceive a long-term dividend as a sign of corporate strength.
The Growth of Dividend-Paying Stocks, 1950-2013
Dividend-paying stocks historically have demonstrated a performance edge. As the attached chart shows, an investor who invested a $1,000 portfolio consisting of the dividend-paying stocks within the S&P 500 in 1950 and reinvested all the dividends would have amassed in excess of $600,000 more than an investor with a portfolio of non-dividend-paying stocks within the index.
Keep in mind that like any stock, dividend-paying stocks can lose money, and there is no guarantee that dividends will be paid in the future. But for investors seeking current income or an income-producing alternative to diversify a portfolio, dividend-paying stocks can be an attractive choice. Morgan Stanley can help you find dividend-paying stocks that suit your portfolio. Call Jared O’Roak, Portfolio Manager and Financial Advisor, for additional details and strategies at 207.561.2006.
Source: Standard & Poor’s. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad US stock market. Data is for the period January 1, 1950, through April 30, 2013. Past performance is not indicative of future results. Investors cannot invest directly in any index.
Equity Securities’ prices may fluctuate in response to specific situations for each company, industry, market conditions, and general economic environment.
Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors do not provide tax advice. Individuals are urged to consult their tax advisor regarding their own tax or financial situation before implementing any strategies.
1Sources: Standard & Poor’s; The Federal Reserve, Selected Interest Rates (Daily) – Report H.15, April 30, 2013.
2Source: Standard & Poor’s. The S&P 500 Dividend Aristocrats index measures the performance of all stocks within the S&P 500 that have increased their dividends each year for the past 25 years. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad US stock market. For the period January 1, 1950, through December 31, 2012. Past performance is not indicative of future results. Investors cannot invest directly in any index.
If you’d like to learn more, please contact Jared O’Roak at 207.561.2006.
Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.
The author(s) are not employees of Morgan Stanley Smith Barney LLC ("Morgan Stanley"). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
Morgan Stanley Financial Advisor(s) engaged Courier Publications to feature this article.
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