Long Live the Dividend!

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This is a follow up to my previous post about dividends. When talking about dividends I always get the same two comments from people:

  • Dividends are insignificant, a few cents here and there is not going to make me wealthy.
  • Dividends are not guaranteed, companies can stop paying dividends at any time.

The first comment was addressed in my previous post; I showed how increasing dividends can actually result in double-digit returns. I showed my personal example of earning over 11% annually with TRP. The second comment about dividends not being guaranteed is true. In fact companies are under no legal obligation to pay out dividends. Companies can reduce or eliminate their dividend at any time.

So why do I focus on dividends so much? Because dividends are cash payments, I make an immediate return on my money regardless if the stock price goes up or down. Once a dividend is paid out companies cannot ask for the money back, this is my safety buffer against bad management or companies that go bankrupt.

In the example of TRP I’ve almost made back my initial investment in dividends. If the company was to go under (the worst case scenario) I would not lose any money. In the event that management lies to investors (eg. Enron, Global Crossing) about financial statements, again the dividends that have been paid cannot be revoked; those dividends are your margin of safety.

A dividend not being guaranteed is true, and no one can tell the future, no analyst or expert can predict if a company will continue to pay dividends in the future. However keep in mind that quality companies are reluctant to reduce or eliminate dividends, because a reduction in the dividend usually results in a lower stock price. When companies raise a dividend they have done their homework and are confident that they can continue to payout the increased dividend in years to come. Generally companies will not increase a dividend if they feel that they cannot afford it, because they don’t want to be reducing the dividend in the future and thereby risk a decline in the stock price.

A dividend increase is usually a positive sign that a company is financially healthy.

Standard & Poor’s establishes an annual list of US companies that have increased their dividends for 25 years or more, the list is called the “S&P 500 Dividend Aristocrats”, for 2011 the list has 42 companies. I’d like to highlight 5 companies below with an impressive track record, remember these are consecutive dividend increases:

Abbott Labs – 36 years of consecutive dividend increases
Coca-Cola – 47 years of consecutive dividend increases
Emerson Electric – 52 years of consecutive dividend increases
Johnson & Johnson  – 47 years of consecutive dividend increases
Procter & Gamble – 55 years of consecutive dividend increases  

Here are a few companies that have paid dividends for more than 100 years:

Bank of Montreal – dividends paid since 1829
Bank of Nova Scotia – dividends paid since 1833
TD Bank – dividends paid since 1857
Imperial Oil – dividends paid since 1891 T

here are many more real-life examples of companies with outstanding dividend payments and increases. As I mentioned before, dividends are not guaranteed and, no one can tell the future, no analyst or expert can predict if a company will continue to pay dividends in the future. However looking at the companies listed above I can have a high degree of confidence that they will continue to payout dividends next year, the year after that, and in the years to come. I also have a high degree of confidence that the dividends will continue to increase.

Remember dividends are the key to success when it comes to investing. Long live the dividend!

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11 comments

I completely agree! Very well written article.

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Kanwal Sarai Feb 6, 2012 02:28pm

Thanks Taline, I wish more people knew about the power of dividends!

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