When Dividends Matter

In bull markets, dividends become more or less irrelevant. When the Dow Jones Industrial Average traded above 14,000 in 2007, very few stocks had a dividend yield of more than 5%. Indeed, at the peak of the 1998-2000 bull market, the yield on the stock market as a whole dropped close to 1%. Investors in such periods are seeking the next excitement, which will provide short-term capital gains. In 2000, they were looking for such excitements mostly from tech companies; in 2007 they were looking for excitement mostly from leveraged positions, perhaps through private equity or hedge funds. Either way, dividend yields played little role.

On the other hand, dividend-paying stocks provide better long-term returns in all but the most extreme bull markets. If the market is flat or gently rising, the dividends themselves provide a nice yield and possibly capital gains that easily outpace any modest capital gains generated by the broad market. If the markets decline, the dividends provide an excellent protection against outperforming the market on the downside.

Source: Money Morning

Related Articles:

• Who is Irving Kahn and Why Should We Listen to Him?
• The Next Great Company
• Bonds: The Next Bubble to Burst?
• 3 Simple Steps For A Successful Retirement
• Dynamic Dividend Investing