Whilst some dividends are being slashed, the vast majority are being held or even increased. It's a great time to stock up on high-yielding, quality companies.
Tell me if this isn't you:
- You're freaking out at least a little because your investments have sunk 20 to 30% -- or more -- over the past year or so. (The FTSE 100 is down 25% over that time frame!)
- You're worried that your retirement may end being a diet of baked beans and tap water.
- You're not sure that you're invested in the most effective shares, bonds, gilts or funds.
These are not insignificant predicaments, but don't worry, I've some good news for you. You may be able to vastly improve the trajectory of your portfolio by investing in a particular kind of stock, the kind that pay out solid and growing dividends.
Why Dividends Rule
By now I hope no one perceives dividends as sleepy little components of sleepy big stocks. If you do, well, let me convince you otherwise: There are lots of reasons to love dividends -- let's review a few of them:
1. Cash consistency
For starters, dividends are generally paid to you regardless of how the underlying share (or overall stock market) is performing. Think back to the ugly year that was 2008. Even through all that carnage in the stock market, most companies still kept paying out their dividends.
Tesco (LSE: TSCO) for instance, is down close to 25% since its peak last year, but it has been paying out a steadily increasing dividend payment for years. Similarly, BAE Systems (LSE: BA) is down over 30% from its 2008 peak, but has consistently increased its cash dividends to shareholders over the past 5 years -- the company is currently trading on a forecast dividend yield of 4.5%.
2. Efficiency, stability
Next, dividends should be attractive because they tend to be attached to relatively stable companies. Now, that might seem strange, given that well-publicized failures Northern Rock and Bradford & Bingley were both dividend payers … or because many "efficient, stable" dividend payers nonetheless lost 30% or 50% of their value last year.
While those are glaring examples, I believe they are exceptions. There are always exceptions and occasional blow-ups, like those in the financial sector, and those companies who took on too much debt in the good times, only to find out how much of a burden it can be in the bad times.
Finally, it's important to pause and reflect on the difference between a company's share price and its value.
If you've taken a 30% haircut over the past year, has the underlying value of the company lost 30%? Think of consumer goods giant Unilever (LSE: ULVR) for example. Its share price is down close to 25% from its 2008 peak and is largely flat since 2006, but throughout that period, it has still been selling millions of units of Persil, Dove, Lipton, Omo and Vaseline. It has grown more valuable, and has kept paying out, and increasing, its dividend over time.
3. Cash today, more cash tomorrow ...
Dividends are also wonderful because they grow -- ideally along with the share price, giving you a one-two punch. Check out the growth rates below of these companies:
| Company | Forecast Dividend Yield | 5-Year Dividend Growth |
|---|
| British Sky Broadcasting (LSE: BSY) | 4.0% | 23% |
| Cable & Wireless (LSE: CW) | 7.1% | 17% |
| ICAP (LSE: IAP) | 4.1% | 16% |
| Sage Goup (LSE: SGE) | 4.1% | 25% |
| Mothercare (LSE: MTC) | 3.6% | 13% |
You're not likely to see any company maintain growth rates of 20% or 30% over 20 years, but there are plenty of firms that have kept up 10%-plus rates for long periods.
Imagine that you spend £10,000 on a share that pays you a 4% dividend, or £400. If that dividend is hiked by an annual average of 12%, it will become more than £3,800 in 20 years!
One key, though, is to reinvest those dividends until you need the income -- which leads to the fourth and final point:
4. Outsmart your retirement nest egg
Think, too, of this: It's generally advised that to make your nest egg last for most or all of your retirement, you should withdraw no more than 4% of it each year (adjusting that along with inflation).
Well, if you're heavily invested in dividend payers and they pay you 4% per year, you may not end up taking anything from your principal at all, giving you more of a safety cushion. Better still, over time, your effective yield will likely surpass 4%. A high-yield portfolio can do wonders for your future.
The Best News Of All
Given our currently struggling economy, this is a particularly attractive time in which to buy dividend payers. Companies you may have wanted to own anyway are now trading for less than they were a year or two ago -- and have fatter yields to boot.
Add it all up and that's why you can't afford to miss these shares right now.
So go ahead and find some great growers on your own, or let us help you. Maynard Paton heads The Motley Fool's Champion Shares premium stock picking service. In his most recent update, Maynard unearthed another four shares with impressive dividend achievements. To find out the names of these companies, and the 15 companies he current rates as a buy, try Champion Shares for free for 30 days. Click here to learn more.
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> This article was first published on Fool.com and has also previously been published on Fool.co.uk. It has been updated again by Bruce Jackson, who has a beneficial interest in ICAP.
