Rates on savings are now so low that investors who aren't upset over what little interest they're earning are simply befuddled about what has happened. The low level of interest rates is a result of borrowing rates that have been slashed in an effort to spark the economy.
Actually, the reduced interest levels are advantageous in several ways. Borrowing is cheaper, and there is a correlation between interest and inflation -- interest rates stay a step above inflation to provide at almost all times a modest return of 1 or 2 percent after inflation and taxes.
Still, many savers are quite unhappy about savings returns, hence the surge in stock prices as a lot of investment money has been switched from ordinary bank or mutual fund savings into stocks. Although the dividends on a majority of stocks are well under even the lower money-market, passbook or certificate-of-deposit rates of today, stocks are attractive for the added value of potential growth of both dividends and share price.
The investor who is willing to buy stocks as an alternative to standard interest savings definitely should consider probable dividend growth. Most well-run companies raise their dividends, sometimes interrupted but not permanently. Some raise their dividends every year, but a large number do so less frequently although still often enough to provide an enhanced return on the original investment.
Investors are often attracted to utility stocks because of their higher yields as well as periodic dividend increases. In recent years, however, there has been a slight risk of dividend cuts or omissions.
Shares of the Baltimore Gas & Electric Co. have a higher current yield than, say, bank CDs that mature in less than five years. In one year -- 1990 -- BG&E's earnings fell below the company's dividend payout but they have moved higher since then. BG&E has not raised its dividend for a couple of years but it has a record of higher dividend payouts for most years and lTC shareholders should keep in mind that a board of directors doesn't usually alter its philosophy.
Washington Real Estate Investment Trust of Bethesda yields a whisker under 5 percent which, on the surface, doesn't seem to be much of an improvement over the various savings vehicles. However, it is the trust's long-term dividend behavior that spells the difference.
Typically, this successful owner and renter of a variety of real estate holdings raises its dividend by 8 cents per share annually. Assume that the current rate of $1.24 a share will be $1.64 in five years means that the yield on invested funds will grow from the current almost 5 percent to 6 1/2 percent, an average over the period of 5 3/4 percent. This is not a spectacular rate but it is competitive with longer-term savings rates, and the higher dividend is likely to have a favorable effect on the share price.
Sears, Roebuck, the giant national retailer, now yields 5.2 percent with a $2-a-share dividend rate that appears to be secure. The recession has troubled Sears as it has most retailers but Sears has other successful businesses, including Allstate Insurance and Dean Witter Financial Services. A review of Sears' history shows a tendency to increase the dividend when prudent. Sears' intention to utilize technology and reduce staff by 7,000 employees through attrition indicates permanently lower overhead, which benefits profits and, eventually, dividends.