The Surging Interest in Dividends, Especially Among Boomers
By David Van Knapp,
a published analyst and author
dave.vanknapp [at] sensiblestocks . com
http://www.SensibleStocks.com
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1934, Benjamin Graham and David Dodd wrote in their classic Security Analysis,
"The prime purpose of a business corporation is to pay dividends to its
owners." Many investors agreed. They considered that the other way an investor
can make money from owning stock--via increases in its price--was speculation
in comparison to a steady flow of dividends.
But by the 1990's, investors' interest in dividends had pretty much dried
up. With market prices rising 20% to 30% or more per year, and some individual
stocks much faster than that, dividend yields of 2% or 3% were real yawners.
They did not play much of a role in most investors' stock selections.
Times change. The bull market of 1982 to 2000 is history. So is the tech-telecom
bubble of 1997-2000 that capped it off. The bubble deflated, leaving investors
who held on with losses of 90% or more. Those losses have finally been made
up on New York Stock Exchange and S&P 500 stocks, but they may not be made
up in our lifetimes on NASDAQ stocks.
And guess what? The baby boomers--the first of whom (like myself) were born
in 1946, are moving into retirement age. In 1999, the oldest boomers were
53 years old--accumulating money as fast as we could for retirement. Two
percent or 3% dividend yields did not help much during the accumulation
phase of our lives.
Now we are 60. For some of us, the accumulation phase is over, and for many
others, it is coming to a rapid close. Several thousand boomers per day
are retiring, taking packages, or otherwise ending their regular working
lives.
And with retirement comes an interest in income! Retirees suddenly become
less interested in two-baggers (a stock that doubles) than in satisfying
their day-to-day money needs. For most boomer retirees, these needs are
met through three sources:
• Pensions. Many (not all) boomer retirees have traditional pensions. Their
number will dwindle each year, because so many companies that used to offer
conventional retirement plans dropped them and are continuing to drop (or
freeze) them as we speak. People in the leading edge of the boomer generation
are more likely to have traditional pensions than people at the trailing
edge. (The latter were born in 1957, and they are now 49 or 50 years old).
• Withdrawals from accumulated savings. Conventional advice is to limit
these to 4% per year or so, or else you will outlive your money. (This category
also includes annuities you may buy--an annuity basically automates the
process of investing your savings and then withdrawing some of it each month
and sending it to you as income.)
• Dividends! Suddenly, that 2% or 3% that looked like junk in 1999 has some
attractive qualities. If a boomer has saved, say $500,000, a 3% yield kicks
out $15,000 per year. Not a fortune, but a good chunk of many boomers' income
needs in retirement.
Notice that I did not list Social Security. No boomer is eligible yet for
Social Security. As boomers reach 62 or 65, of course, Social Security will
kick in and become the fourth source for meeting daily money needs.
Let's recap this so far. Let's say that a boomer who is already retired
receives a pension of $25,000 per year, and also that he or she takes a
drawdown of 4% of $500,000 savings, which equals $20,000 more per year.
That's $45,000 per year from those two sources. Let's further postulate
that this retiree needs $60,000 per year to live a good lifestyle. As we've
already seen, if the boomer's $500,000 in savings kicks out a 3% yield,
that's where the extra $15,000 will come from.
So suddenly, a 3% dividend yield looks mighty interesting. In fact, it is
the difference between a comfortable and uncomfortable retirement for our
boomer. And boomers are displaying an increasing appreciation of formerly
scorned dividends
I have a ringside seat on the explosion of interest in dividends and income.
As the author of a book on stock investing, I advertise on Google--I purchase
those little clickable text ads that appear along with your search results.
The way it works is, I only pay Google when someone clicks on my ad and
is transported to my book's Web site.
I have ads tied to a couple hundred investment-related search terms that
might be typed in by a Google searcher. And I have noticed something very
interesting: About 70% of my clicks come from the few search terms related
to income and dividends. Terms like "dividend paying stocks," "dividend
companies," or simply "dividends." In a recent week, for example, I got
46 clicks (for cost control, I limit the number of clicks I receive per
day). Of those 46 clicks, 35 (more than three-quarters) came from dividend-related
terms. This despite the fact that those search terms comprise only about
15% of all the search terms I cover.
Every time someone clicks on a Google ad, it is like a vote. It indicates
interest. So it is very clear to me that investors searching on Google are
showing a massive interest in dividends and income.
Happily, there is growing research that over the long term, dividend-paying
stocks generate the best total returns. So the dividend-stock investor benefits
in two ways: He or she gets an important income stream, and the stocks perform
better overall. And there is yet a third advantage: Most dividends are taxed
at 15% to the individual, which is lower than most investors' marginal tax
rate. Thus, dividends are the most tax-advantaged form of income you can
have.
The lesson for investors, especially those needing income in retirement,
is this: Make sure that your portfolio has a good slug of dividend-paying
stocks. It is not unreasonable to shoot for an overall portfolio yield of
4%, which is about twice the yield of the S&P 500 at the moment. There are
many safe, "boring" stocks with 4%+ yields available at reasonable prices
right now. Add some to your stock portfolio.
Published - June 2008
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