According to an article on USA Today, dividend stocks in the S&P have outperformed stocks that do not pay dividends by 4% in July and by more than 8% year to date. Dividend payers are up 4.3% while non payers are down 3.3%. After the peak in May, dividend payers are down 4% compared to the nonpayers that dropped 11%.
Jeremy Siegel’s research shows that the top 100 highest paying dividend paying stock in the S&P 500 outperformed the index by more than 3% from 1957-2003, returning more than 14% annually.
Dividend stocks are less volatile than non paying stocks. Thus, dividend paying stocks hold up better because investors less likely to sell out of fear. They have a cash flow every three months that will lessen the pain of a decline in the market. Investors are more likely to hold dividend stocks during a bear market than non payers.
In 2002, dividend payers declined 10.9% compared to 30.3% for nonpayers. But in bull markets, they lag behind non payers. In 2003, dividend payers rose 33.5% compared to the 61.7% of the nonpayers. I can live with that. You cannot have the best of both worlds. You can only expect less volatile stocks to go up less in bull markets and go down less in bear markets.
Dividends are real. You can spend it or reinvest it. And with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (expires 2008, unless renewed), qualified dividends (stocks must be held for 60 days) are only taxed at 15% instead of regular income tax.
I personally, only buy dividend paying stocks in my portfolio. I want all my equity positions to pay some sort of cash flow for holding them. And since I buy stocks when they are down, the dividends will help.
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What dividend stocks would you recommend for a small investor?
My criteria for selecting stocks is pretty simple. I usually buy stocks that have S&P dividend ranking of B+ or better. Then I look for stocks that beaten down at least 20% below their 52 week high. Most stocks I choose in my stock selection universe usually have below average P/E ratio, P/S ratio, P/B ratio, and a below average payout ratio. I usually sell my stocks after a 10% gain.
Right now, I like Wrigleys (WWY), 3M (MMM), Indy Mac Bancorp (NDE), Home Depot (HD) and Alcoa (AA).
I currently own Home Depot, Wrigleys and Alcoa. I am planning on selling Skywest (SKYW) and Abercrombie and Fitch (ANF) to some new stocks.