Dividend Growth Investing Is Back In Favor

From Bloomberg:

How Dividend-Growth Funds Got Their Groove Back: Chet Currier

By Chet Currier

Nov. 28 (Bloomberg) -- Can I interest you in some blue chip stocks -- solid, long-established companies -- offering dividend yields of 6, 8 or 10 percent or more?

Sounds like a pie-in-the-sky proposition, especially in these yield-starved times. But no, it's the real deal.

The hitch is, it requires a long-term commitment of your money and it comes with no guarantees. You buy now, and you get the nice fat dividend payments later -- provided all goes reasonably well in the economy and the financial markets.

Welcome to ``dividend growth'' investing. There's nothing new about this way of managing money. Indeed, it takes us back to the fundamentals.

These days it is enjoying a new popularity among a generation of investors chastened by a bad experience in the late 1990s and early 2000s pursuing profits purely from stock price gains.

A search on my Bloomberg for the phrases ``dividend growth'' and ``rising dividends'' turns up six dozen mutual funds pursuing those missions. Some are long-established, like the $2.8 billion Franklin Rising Dividends Fund, which will soon celebrate its 20th birthday. In the past five years, according to my Bloomberg, the fund has gained 10.9 percent a year compared with 6.1 percent, including dividends, for the Standard & Poor's 500 Index.

Others are brand new, like the Vanguard High Dividend Yield Index Fund, which made its debut this month in both conventional mutual fund and exchange-traded fund formats.

Room at the Top

Some of these funds emphasize high current yields, while others may put the focus on dividend growth rates. Either way, all funds that invest in stocks for income offer the hope of increasing yields in the future.

On the evidence, increasing numbers of investors see that as one of the most promising avenues open to them to seek high income in their retirement years. For a glimpse into how this might work, consider the stock of General Electric Co.

GE happens to be one of Franklin Rising Dividends' 10 largest holdings. According to my Bloomberg, its current quarterly dividend of 25 cents a share gives an annual yield of about 2.8 percent at a recent stock price of around $36.

Now, 2.8 percent may look pretty skimpy. But the company has made a practice of raising the dividend regularly, and it has grown at a 9.4 percent annual rate over the past five years. By my rule-of-thumb calculations, if the dividend keeps growing at a 9 percent clip in the future it will double every eight years.

Looking Ahead

If I were 57 years old now and wanted to retire at 65, in other words, my yield then on GE stock bought today would be more like 5.6 percent. And I would have the hope that the yield would continue to increase in my retirement years, giving me some protection from rising medical costs and inflation.

The big word there, as you doubtless noticed, is ``hope.'' Nothing about the dividend is contractually promised, the way a bond-interest payment is. What I can count on for sure is that the stock price will bounce around all the while I own it, throwing a good scare into me every now and then.

With a mutual fund, I can avail myself of the valuable risk- management tool known as diversification. Even with a fund, of course, I am still exposed to the hazards of economic upsets, stock bear markets and so forth.

That's a price I have to pay to give myself a shot at a better yield down the road than I could lock up now in something guaranteed, like a Treasury bond or a bank certificate of deposit. These days, it must be noted, I can buy Treasuries and some other securities in an inflation-protected format. That is not the same thing, however, as the chance to participate in economic growth that comes with dividends.

Back to Basics

Whatever the future may hold, the revival of interest in dividends is a good and healthy thing. For a time, people began to look at stock investing as a game in which the price was derived from the action of the market itself, or from what somebody said about it.

That's pretty far removed from what really gives a stock its value. A share represents a small part ownership that gives me the right to participate in the company's power to earn money.

The way I gain access to those profits is through present and future dividend payments. If the stock price rises over time, it is because of an increase in the perceived amount of dividends that will or could be paid.

(Chet Currier is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Chet Currier in Los Angeles at ccurrier@bloomberg.net

Last Updated: November 28, 2006 00:05 EST