The Truth About Dividends
By Graham Summers
December 20, 2006
I love dividends.
In these times of market uncertainty, even the traders among us should make moves to have some actual money coming into our accounts. A few long-term high-yield positions can go a long way to stabilizing a portfolio.
And if you think dividends are boring, think again.
Consider: Between 1802 and 2002, equities returned an average of 7.9% a year, according to Robert Arnott, PIMCO All Asset Strategy subadvisor. In other words, $100 invested in 1802 was worth $459 million in 2002. Now realize 5% of that 7.9% average annual return came from dividends.
You can make a ton of money off of income, particularly if you get in on the cheap.
Take Enterprise Products (EPD), for example...
We’ve covered Enterprise in these pages before. It’s one of the largest publicly traded energy partnerships in the U.S., with an enterprise value of more than $15 billion. It owns interests in the processing, refining, storage, and transportation of natural gas.
Currently, Enterprise trades around $29 and yields 6.2%. In 2006, the company paid out $1.80 in dividends. However, if you bought Enterprise back in the summer of 2004 when it was trading at $20, that $1.80 feels more like a 9% yield.
Buy Price |
2006 Dividend |
Yield |
|
$1.80 |
9% |
$29.00 |
$1.80 |
6% |
The same thing can be said for American Capital, another stock we’ve covered in these pages. American Capital is currently trading at $45 and change with a 7.8% yield. In 2006, American Capital paid out $3.33.
However, if you bought American Capital this summer at $34.00, that $3.33 is more like a 9% dividend.
Buy Price |
2006 Dividend |
Yield |
|
$1.80 |
9% |
$45.00 |
$1.80 |
7% |
Don’t think of dividends as fixed income. They’re not. Depending on your buy price and the rate at which the dividend grows, you’re buying for growth. And if you buy cheap and hold, that growth can be pretty stellar. Let’s take a look at Enterprise again, and I’ll show you what I mean.
Common sense tells you that if you bought Enterprise in the summer of 2004 and held until today, you should have made 15% in dividends (2.5 years at a 6% yield), right?
Only if you ignore Enterprise’s share price growth.
If you’d bought Enterprise in the summer of 2004, as we did in Inside Strategist, you’d have paid $20 per share. Enterprise’s share price has since risen to $29. And it’s raised its dividend, too. If you’d bought in the summer of 2004, you’d have since collected $4.22 per share in dividends.
So you would have made 41% in capital gains and 20% in dividends.
And since your buy price is $20, Enterprise’s current yield of 6% is more like a yield of 9%.
Still think dividends are boring?
Good trading,
Graham 
