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The Surging Interest in Dividends--Especially Among Boomers
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
January, 2007
In 1934, Benjamin Graham and David Dodd wrote in their classic Security
Analysis, "The prime purpose of a business corporation is to pay dividends to its
owners." Many investors agreed, considering the other way an investor can
make money from owning stock—price increases—to be speculation in
comparison to a steady flow of dividends.
But by the 1990’s, investors’ interest in dividends had pretty much dried up.
With the market rising 20% to 30% or more per year, and some individual
stocks much faster than that, dividend yields of 2% or 3% were real yawners.
They did not play much of a role in most investors’ stock selections.
Times change. The bull market of 1982 to 2000 is history. So is the tech-
telecom bubble of 1997-2000 that capped off the longest bull run in market
history. The bubble deflated, leaving investors who held on with losses of 90%
or more. Those losses have still not been made up. They will not be made up
within many of our lifetimes.
And guess what? The baby boomers—the first of whom (like myself) were
born in 1946, are moving into retirement age. In 1999, the oldest boomers were
53 years old—accumulating money as fast as we could for retirement. Two
percent or 3% dividend yields did not help much during the accumulation phase
of our lives.
Now we are 60. For some of us, the accumulation phase is over, and for many
others, it is coming to a rapid close. Several thousand boomers per day are
retiring, taking packages, or otherwise ending their regular working lives.
And with retirement comes an interest in income! Retirees suddenly become
less interested in two-baggers (a stock that doubles) than in satisfying their day-
to-day money needs. For most boomer retirees, these needs are met through
three sources:
• Pensions. Many (not all) boomer retirees have traditional pensions. Their
number will dwindle each year, because so many companies that used to offer
conventional retirement plans dropped them and are continuing to drop (or
freeze) them as we speak. People in the leading edge of the boomer generation
are more likely to have traditional pensions than people at the trailing edge. (The
latter were born in 1957, and they are now 49 or 50 years old).
• Withdrawals from accumulated savings. Conventional advice is to limit
these to 4% per year or so, or else you will outlive your money.
• Dividends! Suddenly, that 2% or 3% that looked like junk in 1999 has
some attractive qualities. If a boomer has saved, say $500,000, a 3% yield kicks
out $15,000 per year. Not a fortune, but a good chunk of many boomers’
income needs in retirement.
Notice that I did not list Social Security. No boomer is eligible yet for Social
Security. As boomers reach 62 or 65, of course, Social Security will kick in and
become the fourth “leg of the stool” for meeting daily money needs.
Let’s recap this so far. Let’s say that a boomer who is already retired receives a
pension of $25,000 per year, and also that he or she takes a drawdown of 4%
of $500,000 savings, which equals $20,000 more per year. That’s $45,000 per
year from those two sources. Let’s further postulate that this retiree needs
$60,000 per year to live a good lifestyle. As we’ve already seen, if the boomer’s
$500,000 in savings kicks out a 3% yield, that’s where the extra $15,000 will
come from.
So suddenly, a 3% dividend yield looks mighty interesting. In fact, it is the
difference between a comfortable and uncomfortable retirement for our
boomer. And boomers are displaying an increasing appreciation of formerly
scorned dividends
I have a ringside seat on the explosion of interest in dividends and income. As
the author of a book on stock investing, I advertise on Google—I purchase
those little clickable text ads that appear above and to the right of your search
results. The way it works is, I only pay Google when someone clicks on my ad
and is transported to my book’s website.
I have ads tied to a couple hundred investment-related search terms that might
be typed in by a Google searcher. I’ve grouped those search terms, and my ads,
into six categories: Stocks Generally; Valuation and Value Investing; Stock
Investing Books; Growth Investing; Picking Stocks; and Income and Dividends.
As you might imagine, the ads under Stocks Generally (which includes broad
search terms like “stock investing”) are seen the most, because most searchers
begin with generic inquiries. But those ads don’t generate the most clicks—not
by a long shot.
That honor belongs to the search terms in my Income and Dividends category.
Terms like “dividend paying stocks,” “dividend companies,” or simply
“dividends.” In the past week, for example, I got 46 clicks (for cost control, I
limit the number of clicks I receive per day). Of those 46 clicks, 35 (more than
three-quarters) came from my Income and Dividends category. This despite the
fact that those search terms comprise only about 15% of all the search terms I
cover. This has been going on ever since I started my Google campaign a
couple of months ago.
Every time someone clicks on a Google ad, it is like a vote. It indicates interest.
So it is very clear to me that investors searching on Google are showing a
disproportionate interest in dividends and income. Given the important role that
dividends can play in retirement, this no longer surprises me, although I will
admit that I was shocked for the first couple of weeks. (I thought Picking
Stocks would “win” easily.)
Happily, there is growing research that over the long term, dividend-paying
stocks generate the best total returns. So the dividend-stock investor benefits in
two ways: He or she gets an important income stream, and the stocks perform
better overall. And there is yet a third advantage: Most dividends are taxed at
15% to the individual, which is lower than most investors’ marginal tax rate.
Thus, dividends are the most tax-advantaged form of income you can have.
The lesson for investors, especially those needing income in retirement, is this:
Make sure that your portfolio has a good slug of dividend-paying stocks. It is
not unreasonable to shoot for an overall portfolio yield of 4%, which is about
twice the yield of the S&P 500 at the moment. There are many safe, “boring”
stocks with 4%+ yields available at reasonable prices right now. Add some to
your stock portfolio.
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
January, 2007
In 1934, Benjamin Graham and David Dodd wrote in their classic Security
Analysis, "The prime purpose of a business corporation is to pay dividends to its
owners." Many investors agreed, considering the other way an investor can
make money from owning stock—price increases—to be speculation in
comparison to a steady flow of dividends.
But by the 1990’s, investors’ interest in dividends had pretty much dried up.
With the market rising 20% to 30% or more per year, and some individual
stocks much faster than that, dividend yields of 2% or 3% were real yawners.
They did not play much of a role in most investors’ stock selections.
Times change. The bull market of 1982 to 2000 is history. So is the tech-
telecom bubble of 1997-2000 that capped off the longest bull run in market
history. The bubble deflated, leaving investors who held on with losses of 90%
or more. Those losses have still not been made up. They will not be made up
within many of our lifetimes.
And guess what? The baby boomers—the first of whom (like myself) were
born in 1946, are moving into retirement age. In 1999, the oldest boomers were
53 years old—accumulating money as fast as we could for retirement. Two
percent or 3% dividend yields did not help much during the accumulation phase
of our lives.
Now we are 60. For some of us, the accumulation phase is over, and for many
others, it is coming to a rapid close. Several thousand boomers per day are
retiring, taking packages, or otherwise ending their regular working lives.
And with retirement comes an interest in income! Retirees suddenly become
less interested in two-baggers (a stock that doubles) than in satisfying their day-
to-day money needs. For most boomer retirees, these needs are met through
three sources:
• Pensions. Many (not all) boomer retirees have traditional pensions. Their
number will dwindle each year, because so many companies that used to offer
conventional retirement plans dropped them and are continuing to drop (or
freeze) them as we speak. People in the leading edge of the boomer generation
are more likely to have traditional pensions than people at the trailing edge. (The
latter were born in 1957, and they are now 49 or 50 years old).
• Withdrawals from accumulated savings. Conventional advice is to limit
these to 4% per year or so, or else you will outlive your money.
• Dividends! Suddenly, that 2% or 3% that looked like junk in 1999 has
some attractive qualities. If a boomer has saved, say $500,000, a 3% yield kicks
out $15,000 per year. Not a fortune, but a good chunk of many boomers’
income needs in retirement.
Notice that I did not list Social Security. No boomer is eligible yet for Social
Security. As boomers reach 62 or 65, of course, Social Security will kick in and
become the fourth “leg of the stool” for meeting daily money needs.
Let’s recap this so far. Let’s say that a boomer who is already retired receives a
pension of $25,000 per year, and also that he or she takes a drawdown of 4%
of $500,000 savings, which equals $20,000 more per year. That’s $45,000 per
year from those two sources. Let’s further postulate that this retiree needs
$60,000 per year to live a good lifestyle. As we’ve already seen, if the boomer’s
$500,000 in savings kicks out a 3% yield, that’s where the extra $15,000 will
come from.
So suddenly, a 3% dividend yield looks mighty interesting. In fact, it is the
difference between a comfortable and uncomfortable retirement for our
boomer. And boomers are displaying an increasing appreciation of formerly
scorned dividends
I have a ringside seat on the explosion of interest in dividends and income. As
the author of a book on stock investing, I advertise on Google—I purchase
those little clickable text ads that appear above and to the right of your search
results. The way it works is, I only pay Google when someone clicks on my ad
and is transported to my book’s website.
I have ads tied to a couple hundred investment-related search terms that might
be typed in by a Google searcher. I’ve grouped those search terms, and my ads,
into six categories: Stocks Generally; Valuation and Value Investing; Stock
Investing Books; Growth Investing; Picking Stocks; and Income and Dividends.
As you might imagine, the ads under Stocks Generally (which includes broad
search terms like “stock investing”) are seen the most, because most searchers
begin with generic inquiries. But those ads don’t generate the most clicks—not
by a long shot.
That honor belongs to the search terms in my Income and Dividends category.
Terms like “dividend paying stocks,” “dividend companies,” or simply
“dividends.” In the past week, for example, I got 46 clicks (for cost control, I
limit the number of clicks I receive per day). Of those 46 clicks, 35 (more than
three-quarters) came from my Income and Dividends category. This despite the
fact that those search terms comprise only about 15% of all the search terms I
cover. This has been going on ever since I started my Google campaign a
couple of months ago.
Every time someone clicks on a Google ad, it is like a vote. It indicates interest.
So it is very clear to me that investors searching on Google are showing a
disproportionate interest in dividends and income. Given the important role that
dividends can play in retirement, this no longer surprises me, although I will
admit that I was shocked for the first couple of weeks. (I thought Picking
Stocks would “win” easily.)
Happily, there is growing research that over the long term, dividend-paying
stocks generate the best total returns. So the dividend-stock investor benefits in
two ways: He or she gets an important income stream, and the stocks perform
better overall. And there is yet a third advantage: Most dividends are taxed at
15% to the individual, which is lower than most investors’ marginal tax rate.
Thus, dividends are the most tax-advantaged form of income you can have.
The lesson for investors, especially those needing income in retirement, is this:
Make sure that your portfolio has a good slug of dividend-paying stocks. It is
not unreasonable to shoot for an overall portfolio yield of 4%, which is about
twice the yield of the S&P 500 at the moment. There are many safe, “boring”
stocks with 4%+ yields available at reasonable prices right now. Add some to
your stock portfolio.
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