Benefit of Dividends to Stock Investing!

Last updated on Dec 16, 2007

Posted on Dec 16, 2007

Joshua Kennon says in his Investing blog this about dividends:

In his classic 1938 text The Theory of Investment Value, John Burr Williams published the following poem:
“A cow for her milk, a hen for her eggs, And a stock, by heck,
For her dividends.
An orchard for fruit, Bees for their honey, And stocks, besides,
For their dividends.”
As the market volatility has increased lately, it’s becoming increasing apparent that investors focused on fundamental earnings and dividends are being rewarded through their purchase of additional, cheaper shares at lower prices through reinvestment.

Well, the importance of dividends was emphasized by Jeremy Siegel – the Finance Prof at Wharton and author of the best sellers “Stocks for the Long Run” and “The Future of Investors”.   He showed by Altria (MO) was such a great investment – over all other “superstars” and the best of funds.

In fact, according to my research, Philip Morris has offered better long-term returns to its stockholders than any other stock, nearly doubling the returns on the market over the last half century and crushing the performance of virtually every other mutual fund and active money manager. Let the facts speak for themselves.
For all companies trading 80 years ago in 1925, when our comprehensive returns on individual stocks begin, the company’s average annual returns exceed 17 percent per year versus 10 percent for the market, surpassing all other stocks.
From 1957, when the S&P 500 Index was founded, Phillip Morris has yielded nearly 20 percent per year, outclassing the other 499 members of this venerable index by wide margins.
To give you an idea how strong this performance is, if you put $1,000 in an index fund when the S&P 500 Index was founded and reinvested your dividends, you would have about $140,000 today. But if you put $1,000 in Philip Morris stock, you would have over $6 million dollars today — more than 40 times as much!

I have a very simple methodology for researching stock for investing:

1. Look up Yahoo Finance for the profile.  See what the company does.
2. Look up the Statistics on Yahoo Finance.  The stats to look: ROE and ROA – they shouldnt be so drastically different and they should be above 15%.  Then the NPM (Net Profit Margin) and OPM (Operating Profit Margin) – should also be > 15% and not so drastically different (some percentage is for the taxes and the other finance costs – but other than that… it should not mean a 50 % difference!).  Then I look at the dividend percentage.  If it has some (good the better) dividend.. then its an ideal investment!
3. Then I look at the industry to make sure I believe the industry will make money on a long term basis.

These are essentially my stock research process.  It has stood me in good stead until now.  WHat is yours?

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