How to get paid while you wait, with dividends

Think of Howard Silverblatt as a market scientist. As senior index analyst for Standard & Poor's he slices and dices the massive flow of financial data in his laboratory high above Wall Street - and he's on to something: dividends are making a big comeback. "The turn has occurred", he says.

According to S&P, 154 of the companies listed on the S&P 500 boosted their dividends to shareholders and eight started paying dividends by the first half of the current quarterly earnings season. With strong earnings and over one trillion dollars in cash he says more companies in the index are paying out now than any time since January 2000. "We think that this is going to continue easily throughout this year."

Leading the charge are cash-rich technology companies like Apple Computer with an estimated $110 billion (that's right — billion) cash on its books. Apple only initiated its dividend over the past year and even with a modest yield of 1.8 percent the company is now the world's third largest dividend payer behind Exxon Mobil and AT&T.

Right now the average annual dividend yield from the tech sector is only 1.5 percent compared with a 2.1 percent average yield for the entire S&P 500, but the sector is now the second largest dividend payer behind consumer staples. Technology currently pays 13.5 percent of all S&P 500 dividends compared with six percent in 2007. Mr. Silverblatt says if cash-rich Google initiates a dividend, tech will be the largest.

Back to the Future

Nearly a third of S&P 500 reported earnings are now passed along to shareholders — a steep climb since the financial meltdown when the dividend stream dried up in the last quarter of 2008.

But the dividend drought really began thirty years ago at the dawn of the longest bull market in modern history when dividends took a back seat to stock prices. Before the mid 1980s the stock market had been relatively flat for over three decades (could we include a link to a S&P 500 chart here? 1930 to present) and dividend payouts accounted for most of the return on the average stock. To get an idea of the significance of dividends in the past the average payout from 1930 to now is 52 percent of reported earnings.

Who's a Good Boy?

The point is — dividends are playing a bigger and bigger role in investing and real investors need to stop leaning so heavily on the stock market for returns. Leave the casino mentality to speculators who roll the dice on the stock market.

A good dividend stock is like a good dog. No matter how bad your days goes, that dog is waiting at the door when you get home with its tail wagging ready to give you a good, wet, lick on the face.

To translate that for non-dog-lovers; the stock market may go up and down, and the value of your stock could rise and fall, but your dividend will be waiting for you on your next balance statement. It's not maybe money, it's real money.

Corporations pay out dividends based on the number of shares an investor holds and not the price of the share. In other words, you get paid while waiting for the share price to regain its value or rise.

By loading up your investment portfolio with a diversified collection of good dividend paying stocks you will have a steady stream of income to grow your savings even if equity markets trade flat for another thirty years. That's a lot of licks.

Don't be a dividend chaser

You might think finding a good dividend stock is as easy as finding the company that pays the highest yield. Unfortunately, dividend yields don't work like bond yields. Dividend yields are paid out at the discretion of the company based on current earnings and estimates for future earnings.

Sometimes a company finds it more prudent to invest earnings in expansion or research and development, or hold back payouts to preserve the dividend in future quarters.

Some companies pay high dividends to boost their stock price and investors could be paying a premium for a stock that is overpriced or a dividend that is not sustainable.

The true value of a dividend stock is based on its dividend sustainability and growth potential.

That means conducting a little scientific investigation of your own. Look at the company's financial statement for a record of sustainable and growing revenue, and sustainable and growing earnings.