The Case For Dividends Stocks And Mutual Funds
You may still be looking for the mix of investments where you can get a good return, without too much risks. I know when I look at my bank savings account and see that it is barely keeping up with the cost of living (just compare bank interest rates to the consumer price index) and bonds only returning 3 to 4% I start to look around for something better. If you are like me, then you might be on the hunt for any investment that can turn out a better yield than savings or bonds.
Trouble is stocks have everyone rightful cautious. But you should be aware that since the market lows of March 2009, stocks in companies that don't pay a dividend gained 65% while the 363 stocks in the S&P 500 that pay dividends gained 26%. So the case could be made that low quality companies should be where you want to invest in 2010. It was the place to be in 2009, but low-quality stocks with no dividends and no earnings typically out perform the market, only because we are coming out a market recovery. As we start to enter a new phase of economic recovery, will see quality companies that pay a dividend do better. The best performers in the last four months have been strong dividend payers. The first and second quarters of 2010 may very well see a weak recovery.
Investors should see paying a dividend as a sign of corporate strength. Here is some historical data that might help the case for dividend stocks. Looking at the S&P 500 index since 1972, The index as a whole produced a annualized total return of 8.5%, non-dividend paying stocks, only 1.2%, while the average dividend-paying stock produced an 8.5% annualized total return, according to Ned Davis Research. Those dividend stocks also outperformed with one-third less volatility than with non-dividend payers.
If you are not ready to invest in individual stocks, you may want to consider a dividend-oriented mutual fund or exchange-traded fund. These funds typical deploy on of three investment approaches: equity-income, dividend growth and Dividend Capture.
Equity-income funds are usually the most conservative, seeking stable high current dividend yields. Two of my favorites are TRowe Price Equity Income and American Century Equity Income. Both look for companies that have a history of paying dividends in good and bad times. One advantage of equity-income funds is they can also buy convertible bonds, rather than the stock of a company. The bonds, which are convertible into the company's stock, are senior to stocks in a company's capital structure, and so have first dibs on the company's income stream.
By contrast, a dividend growth fund like, Vanguard Dividend Growth puts its focus on future dividend increases. With Vanguard funds having some of the lowest expense ratios in the industry, you also see more of your money returned to you. Vanguard Dividend Growth beat the broad market in 2008, while everyone else was dropping by 40% or more, this fund only fell 25%. It has beaten 95% of its peers in the past five years.
Other managers employ novel strategies to boost yields. The most common is called dividend capture. To "capture" as many dividends as possible, managers buy stocks right before their payouts and sell them soon afterwards, then move on to the next dividend stock. The trouble with this approach is turnover of stocks increases the transactions costs for the fund, so they need to beat their peers significantly in order to justify the additional costs. I like to keep costs low, so a core holding in my mutual funds are index funds and equity-income funds.
Read more about financial markets and investing in "Figuring Out Wall Street, Consumer's Guide to Financial Markets". Available at www.figuringoutwallstreet.com.
Floyd D. Saunders has 35 years of experience in the financial services industry. Floyd's diverse background includes experience in retail banking, investment banking, insurance, investments, financial planning, and tax preparation. He has been an adjunct faculty member for St. Mary's College, Moraga, California, and Community Colleges in California, teaching courses in managerial finance, money and banking, and principles of banking. He has also taught extensively for the American Institute of Banking and various banks. Mr. Saunders' professional experience includes assignments in the business lines of retail banking operations, investment banking, institutional trust and securities services, employee and management training, and systems engineering for banking, accounting, and tax preparation firms. He has worked for Bank of America, JP Morgan and JPMorgan Chase, and as a consultant in the financial services industry. He has prior experience as a registered representative and has published several articles on personal financial planning. Mr. Saunders has authored four programs for the American Bankers Association, Banking on Mutual Funds and Annuities, Mutual Funds and Annuities, Introduction to Securities Markets and Investing in Securities. Mr. Saunders earned a Master of Arts degree in Management from Central Michigan University and a Bachelor of Arts degree from San Diego State University. Read his latest book, "Figuring Out Wall Street, Consumer's Guide to Financial Markets". Available at www.figuringoutwallstreet.com
Article Source: ArticlesBase.com
