(Corrects spelling of "Vodafone" in paragraph 12, instead of
By John Wasik
CHICAGO, Sept 9 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
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
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.
While dividend growers are much less volatile than
non-dividend-paying stocks - Howard found their standard
deviation to be eight percentage points lower - they won't dodge
all market risk. Prices will still get battered in any
An exchange-trade fund such as the SPDR Dividend ETF
, which focuses on a variety of North American dividend
payers, for example, lost almost 23 percent in 2008. Still, that
was about 14 percentage points better than the drop in the S&P
500 in that dismal year.
The SPDR fund tracks the S&P High Yield Dividend Aristocrats
Index, an elite group of companies with consistent growth in
dividends because of robust cash flow. The fund includes
household names such as AT&T Inc, Clorox Co and
Chevron Corp. Not only do these companies pay high
dividends, they have durable business models and can find ways
to grow even during sluggish economies.
The fund charges 0.35 percent annually for expenses and
currently pays a 2 percent yield.
BULL MARKET FOR DIVIDENDS
As the Federal Reserve considers pulling back its
$85-billion-a-month bond-buying program, which could drive a
stake into the 30-plus year bond bull market, dividend-paying
stocks have held up especially well. For the year through, Sept.
6, the SPDR ETF is up nearly 20 percent for the year, besting
the S&P 500 by 1.5 percentage points.
A worthy addition to a high-dividend portfolio would be the
PowerShares International Dividend Achievers ETF, which
gives you non-U.S. stock exposure.
The PowerShares fund is up almost 14 percent for the year
through Sept. 6 and yields just over 2 percent. You'll pay 0.56
percent in annual expenses. It holds large companies such as
Vodafone Group PLC, AstraZeneca PLC and BHP
It's not often that stock funds are less volatile than
bonds, but the current environment favors companies sitting on
cash, paying healthy dividends and increasing profits, versus
fixed-payment bonds, whose prices that could drop further when
Contrast dividend-achieving stock returns with a
broad-basket U.S. bond fund such as the iShares Core U.S. Total
Bond Market ETF, which is down 3 percent for the year
through Sept. 6.
While I hold this fund in my 401(k) - and don't plan to sell
it because it represents a broad swath of U.S. bonds - it has
been volatile as the Fed ruminates over monetary policy and the
possibility of raising rates in a recovering economy.
Keep in mind that if the U.S. economy slows down or there is
another global financial calamity, investors could retreat from
stocks en masse and back into Treasuries.
(Follow us @ReutersMoney or here;
editing by Lauren Young and Douglas Royalty)