Back in 1976, McDonald’s paid its first dividend: $10 a year to the owner of 100 shares. That was enough to buy 15 Big Macs. Suppose our burger-loving shareholder has held onto those 100 shares for the last 36 years.
“On the back of dividends alone, this shareholder has enough to buy around 2,800 Big Macs,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, wrote in a recent commentary. “The dividend now received is around $11,300 per year.”
Luschini points out that the dividend yield on the S&P 500 has moved higher than the yield on the 10-year Treasury bond for the first time in a half century.
“In such a low-interest rate environment, investors would be ill-served to ignore the dividend yields offered by many high quality stocks,” he concludes. “A broadly-diversified portfolio of dividend-paying companies can help to deliver the income needed to meet today’s expenses as well as those in the years to come.”
In response to an On Wall Street query, Luschini predicted that dividend payouts will grow in 2012. “Over many decades,” he said, “the dividend yield on the S&P 500 index has risen at a rate of 5% annually. I expect an increase, if not exactly a 5% increase, to continue. More companies are raising or implementing a dividend because they have a lot of cash, profits have been good, and payout ratios afford the room to pay cash to shareholders.” Aggregate
payout ratios are about 30% below their average level for the past two decades, he reports.
Luschini told On Wall Street that a “dividend-friendly tax policy helps to motivate management to view dividends as good for shareholders,” which will increase prospects for higher dividends. In 2012, at least, most dividends paid to investors are taxed at 0% or 15%. President Obama has proposed raising the tax rate on dividends next year, but only for taxpayers with income over $200,000 a year ($250,000 for couples filing jointly).
Did Luschini’s pro-dividend commentary spark a reaction from Janney advisors? “Definitely,” he answers. “Although this has been a theme that we have advocated for some time, this piece not only highlighted the virtue of using stocks for income, but also that dividend payers often provide a rising stream of income. This latter point is especially important for those looking for income to enable them to defend against the loss of purchasing power due to rising prices. The commentary we provided to financial advisors, therefore, reinforces and codifies the theme in a deliverable form that clients can read and relate to on a personal level. I think this contributed to the very positive reception from Janney’s financial advisors.”
Advisors are now recommending more dividend-paying stocks and funds with those stocks, according to Luschini. “The illumination that an article like this can bring to the dialogue helps to facilitate the recommendation to action.”
Donald Jay Korn writes for On Wall Street.