Why Dividend-growing Stocks are Beating Bonds

September 09, 2013

Reuters

With all the angst in the market lately about rising rates bruising bond prices, where can you find reasonable income with less sensitivity to interest-rate movements?

The answer, surprisingly enough, is dividend-growing stocks. These cash-rich companies not only have the ability to raise payouts but their returns are still competitive with bonds in a low-rate environment.

Dividend growers can offer better performance than bonds because total return rises as the dividend yield is increased. (Total return is a stock’s appreciation plus reinvestment of dividends and capital gains before taxes.)

C. Thomas Howard, an emeritus professor of finance at the University of Denver, found that annual returns of stocks in the Standard & Poor’s 500-stock index rose from 0.22 percent (for large companies) to 0.46 percent (small companies) for every percentage-point hike in yield from 1973-2010.

When Howard compared dividend growers with companies that cut payouts, the difference was even more pronounced. He discovered that dividend raisers outperformed dividend cutters by 10 percentage points, on average, during that period.