Dividends deserve a bit of respect

INVESTING

November 21, 1999|By Bill Atkinson

LIKE THE bug-eyed comedian Rodney Dangerfield, dividends get no respect.

Many investors, especially younger ones, want a quick bang for their buck, so they buy shares of fast-growing technology and biotechnology companies, or jump for a company that is going public -- ignoring "stodgy" dividend-payers.

But dividends can add a powerful kick to a portfolio, and they shouldn't be overlooked, experts say.

"We love dividends," says James K. Glassman, a fellow at the American Enterprise Institute in Washington and co-author of "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market."

Here's why: A $1,000 investment 10 years ago in pharmaceutical maker American Home Products Corp. is worth $3,943 today, based solely on its stock appreciation. That's an annual average increase of about 15 percent. But add in American's dividend payments, and the initial investment is worth $5,481 -- a nearly 19 percent annual average increase.

What's more important is that American has increased its dividend 48 consecutive years.

"That is what people forget about dividends, they grow," Glassman says. "If you are a long-term investor, you can start low and end up pretty high."

He likes Tootsie Roll Industries Inc., not for the sweets but because the dividend is rising fast.

"A dividend alone is not enough," Glassman says. "What you want is growing dividends."

Exxon Corp. is one of his favorite examples. An investor who bought $1,000 worth of the company's stock 10 years ago would have been paid $60 in dividends. Today, he would receive $270 in dividends for every $1,000.

But dividends are disappearing. Last year, only 20.7 percent of publicly traded companies paid cash dividends, compared with 66.5 percent in 1978, according to a study by Eugene F. Fama and Kenneth R. French, business professors at the University of Chicago and Massachusetts Institute of Technology respectively.

In addition, the average dividend yield paid by Standard & Poor's 500 companies has fallen to 1.8 percent, compared with 4.5 percent in 1977. Of the 500 companies, 404 pay dividends, compared with 473 in 1977, with an average yield of 4.5 percent, according to Standard & Poor's.

Companies generally pay dividends to reward shareholders and reassure them that money will flow into their pockets. But many companies in rapidly growing technology and Internet businesses don't pay dividends.

Since many of these companies are young and don't have proven track records, cash is important. So they elect to fund the business rather than give money to shareholders. At the other end, some of the bigger dividend-paying companies such as manufacturers and utilities have become less significant, said David Blitzer, chief economist at Standard & Poor's.

"They are not as big a piece of the action as they were 20 or 30 years ago," he said.

Of the Standard & Poor's 500 companies, the biggest dividend payers include J. C. Penney Co., whose dividends yield is 9.7 percent; Central and South West Corp., a Dallas-based utility, which yields 8.3 percent; and San Diego-based Sempra Energy, which yields 8 percent.

Not all companies that pay dividends are old-line business, of course. Computer maker Hewlett-Packard Co. pays dividends, as do Intel Corp., Fannie Mae and Pfizer Inc.

Another reason dividends are disappearing is that some companies would rather buy back their own shares to boost their stock price. In addition, many investors don't care about dividends because the stock market has been booming in recent years.

"When you get 20 percent returns, it is hard to sell somebody on a yield," says Howard Silverblatt, editor of the quantitative services group at Standard & Poor's.

William Stromberg, director of research at Baltimore-based T. Rowe Price Associates Inc. and manager of the T. Rowe Price Dividend Growth Fund, says dividends have become an afterthought by both companies and investors. "Right now the market is not demanding that they pay dividends, so why should they?" he says.

Historically, dividends have made up about half of investors' returns. And Stromberg believes that it is only a matter of time before investors begin to think seriously about why dividends matter.

"When returns overall become tougher to come by, people will value the dividend component more highly," he says. "When you make 20-plus percent each year, and most investors expect 20 percent per year, why does a 2 percent dividend matter? There is what I call a high degree of optimism in the marketplace."

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