How would you like a 15% pay raise? Where? Bonds? No. Stocks? Yes!
The dollar amount of dividend payments underlying the Standard & Poor's 500 stock index is projected to increase 15% this year, according to estimates by Howard Silverblatt, senior index analyst at S&P, and reported by Smart Money.
The news could be even better. If technology companies such as Google, Amazon.com, eBay and Dell initiate dividend payments, following Apple's recent announcement to start a dividend, then your pay raise could be even higher. In 2011, there were 22 companies that announced new dividend payments. Nonetheless, only 397 companies in the S&P 500 now pay dividends, versus an average since 1980 of 413 companies. As further reason for optimism, dividend payments as a percentage of company profits are now about 30% versus a historical average of 52%.
Banks could be another source of positive surprises. Many banks cut their dividends in the global financial crises but have started to restore cash payments to shareholders. Financial companies comprised 29% of the dividends paid in 2007, fell to a low of 9% in 2010 and are up to 13% now. There is more room for dividend growth from banks.
Not only do stocks that increase their dividends give you a pay raise, they also provide better long-term total return according to a study by Columbia University professor Doron Nissim that was published in the Journal of Finance in 2001.
The recent stock dividend yield on the S&P 500 is just over 2%, which is very competitive with interest rates on bonds, but dividends can grow whereas bond interest payments are usually fixed.
Investing in stocks for income is only suitable for long-term investors and investors must be willing to tolerate the price volatility that comes with stocks. Money that may be needed within five years or so should be kept in bonds and cash equivalents.
So consider looking at stock investments in a different way and enjoy pay raises dividend income increases along the way!
About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.