Uncle Gary Asks, “If dividends are the way to accumulate wealth, does it pay to own stocks that don’t pay a dividend?”
The idea that triggers this thought is an article I read a few weeks ago:
Adopt a long-term investment approach (future dividend flows), rather than momentum (short-term price change).
Step one is all about a simple choice you have. You can decide to invest in a business as an owner, allowing the business to generate long-term wealth for you. Or you can decide to buy a piece of paper in hopes that someone will buy your paper at a higher price than what you paid for it.
As the owner of a business you are entitled to receive all the earnings that your company can generate through its day to day operations. These earnings can be paid to you in either a check, or as a reinvestment towards the future growth of you business.
For the past 100 years or so, businesses in the U.S. have generated about a 5% annual growth in capital through reinvested earnings, and in addition have paid about 4.5% a year in income to their owners. The funny thing is, the U.S. Stock Market has averaged an almost identical return with a 4.5% dividend yield and a 5% earnings growth.
The problem for many shareholders in adopting this long term approach is that many of you measure the value of your business by the daily market price of your company’s shares. Thinking only about the short-term price swings, instead of business operation performance, will place you into the momentum camp. Resist it and you will be rewarded.
I like stocks that yield rather than bonds. Bonds are overbought in my opinion and many others .
Even with dividend taxes going up January 1, 2010 (if the Bush tax cuts are allowed to expire), I believe in dividend paying stocks. They are all near their lows for the year since investors have been anticipating the tax cut repeal.
But what if the tax cuts are extended for some or all including those making over $250K/yr? This could be extra bullish for high dividend yielding stocks.
That’s why I have been buying high dividend stock such as MO (my favorite at 6.74%), ED at 5.04%, INTC at 3.4%, GE at 3.3%, PG at 3.2%, TAP at 2.5%, WMT at 2.37%, MSFT at 2.18, CSX at 1.98% and KR at 1.87%.