Tuesday, December 7, 2010

Just how important are dividends?


For many years I have been telling clients and prospects that I want to be paid while I wait so that dividends and interest help reduce volatility. In the Fed Chairman interview last Sunday he said that it could take perhaps up to 5 years to work our way out of this problem. He pointed out that we need the economy to grow by 2.5% just to keep the unemployment at its current level. For those readers who are my client’s you know how dividends protected your income and were the basis for the price recovery. I ran across the following quotes yesterday and I think it makes my point about the importance of dividends and interest.

BlackRock’s Richard Turnill and Stuart Reeve, who head the global equity team for the world’s largest money manager said that “Some may be surprised to learn that 90 percent of U.S. equity returns over the last century have been delivered by dividends and dividend growth,” In a report to their clients they are advocating investment in dividend stocks. Congress is reportedly close to a bipartisan agreement on the Bush tax cuts, including the dividend tax. The agreement would extend them for all income brackets for at least 2 years. President Obama said in a press conference that he doesn’t want taxes to go up next year for “ordinary Americans.”

The potential compromise couldn’t come at a more crucial time for stock investors. The total return for equities is determined by price appreciation and dividend income. Following a decade of zero total price appreciation and a rejection in the boardrooms of dividends as an effective allocation of capital, the BlackRock strategists say the time is right. They cited the low-yielding investment alternatives out there, an aging baby boomer population that will crave that dividend income, and an economic outlook for slow growth.

Dan Perkins

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