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For investors, it's all about the dividends

January 13, 2012 — USA Today — By Matt Krantz   Bookmark and Share

Dividends have gone from being an afterthought to one of the top things on many investors' minds.

These periodic payments by companies to their investors are taking an oversized role in the markets. Given the stock market's disappointing performance last year and lackluster targets for 2012, investors are happy taking what they see as a safer bet. That craving for dependable, albeit not guaranteed, dividend income could continue, given that interest rates remain low, analysts say.

"People are throwing in the towel on the horse race," says Jack Ablin of Harris Private Bank. "They want a dividend program that can deliver."

Consider that:

  • Dividends were the sole source of return for many stock investors in 2011. The 2.1% total return by the Standard & Poor's 500 last year was entirely due to the 2.1% dividend yield, says S&P Capital IQ. That's the highest contribution of dividends to investors' total return since 2008, when the stock market's 38.5% decline was partly offset by a 1.5% dividend.
  • Dividends were the biggest contributor to investors' total returns since at least 1988 if years the market fell are excluded.
  • Dividend-paying stocks held up better than dividend holdouts. Not only did investors enjoy cash from stocks that paid dividends, they avoided more disappointing losses, too. Stocks that paid a dividend gained 1.4% on average in 2011, vs. a 7.6% average loss for S&P 500 stocks that didn't pay a dividend, says S&P Capital IQ.
  • Dividend-paying stocks have been beating the market. The S&P Dividend ETF rose nearly 4% last year, edging out the 0% gain of the S&P 500.
  • Dividends carried the load in '11

Dividends accounted for all the total return investors received last year.

Looking into 2012, investors have high hopes for dividend-paying stocks. Nearly three-quarters of S&P 500 companies are expected to boost their dividends in 2012. Investors are likely to see at least an 11% increase in dividends, and possibly much more, meaning dividends could top the previous record set in June 2008, according to S&P Capital IQ.

Some investors believe it's more likely that companies will raise dividends than that economic growth will boost stock prices, says Rick Helm, portfolio manager of the Cohen and Steers Dividend Value fund.

An increase in yields on Treasuries and other safe investments could make dividend-paying stocks relatively less attractive, says Kevin Shacknofsky of the Alpine Dynamic Dividend fund. But unless that happens in a big way, investors looking for income see dividend-paying stocks as "another alternative," he says.