The stock market may be one of the few places in the world (outside, perhaps, Match.com and eHarmony) where the word "mature" is considered pejorative.
Clients may prefer a mature financial advisor -- a person who has seen the potential pitfalls and knows from experience how to navigate them -- but reject owning shares of a mature company because it no longer offers the growth potential of a startup.
Yet investing in mature companies entails much less risk and can be rewarding to those who are patient.
Unfortunately, many investors still focus on stock appreciation rather than total return. Clients tend to ignore dividend payments, which trickle in over time. And nobody has ever wowed friends with tales of dividends collected over the years.
OLD STOCKS, HIGH YIELDS
But holding stocks with long dividend histories can often provide yields of 4% or more.
Here's how: Assume one of your clients acquired a good dividend-paying stock a decade ago. Since share prices can vary considerably over the course of a year, let's also assume the cost was the average of the high and low prices for 2004.
If that stock was Coca-Cola, your client's current yield on cost would be 5.3%. Investors in oil company Chevron fared even better, with a yield on average 2004 cost of 8.7%.
The following table lists the nine Dow stocks that have paid dividends for 100 years or longer. Although Chevron and Coca-Cola are two of the best results from the list, eight of the nine have yields on cost better than the 2.5% now available in 10-year Treasury notes.
This is not to imply that stocks, even those with good dividends, are bond substitutes. It is just to show that long-term owners of dividend stocks can reap significant returns.
YIELD ON COST
And yield on cost is a good metric for people who have held positions for some time. Coke's current yield is about 3%, but those who have held the stock for a decade have seen their dividends rise while their cost basis remained the same. For them, the yield on their investment is now 5.3%.
Many advisors are reluctant to use individual stocks in portfolios because of the possibility of event risk or overconcentration of assets. Fortunately, yield on cost works very well in diversified dividend-paying stock funds.
For example, the 30 stocks in the Dow are packaged as the SPDR Dow Jones Industrial Average ETF (DIA). Buyers of that fund a decade ago now enjoy a yield on cost of 3.4% vs. the ETF's recent yield of about 2%.
The DJIA has no requirement that stocks increase their dividends to remain in the benchmark, of course. And an ETF that holds only stocks with a history of boosting dividends will look even better when viewed through the yield-on-cost lens.
Of course, age alone doesn't guarantee success; retailer W.T. Grant was a 70-year-old business when it failed in 1976.
But companies that adapt to changing conditions are the ones that survive. Financial services giant American Express, for example, started as a private mail carrier in 1850.
Each of the 30 stocks in the DJIA currently pays a dividend -- as do more than 84% of the issues in the broader Standard & Poor's 500. Indeed, over the past 20 years, dividends have accounted for 27.7%, on average, of the total return of the S&P 500. And thats for a period when payout ratios were lower than the long-term trend.
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