The Undeniable Power of Steady Dividends

I was both amazed and encouraged by the great turnout I received for my workshop at last week’s MoneyShow. And if you were among the nearly 400 attendees who came to see me speak, I’d like to thank you once again for your time and loyalty.

It was an honor to share my opinions with so many passionate, intelligent investors at a live event. And the questions I received were both enlightening AND challenging.

In next week’s column, I’m going to tackle some of the questions I didn’t get a chance to answer during the event. Plus, I’ll follow-up on some of the questions I did answer, too!

But first, today, I would like to sum up the points I made in Orlando. I think it’s crucial that you understand them, especially if you’re trying to find new sources of investment income right now …

The Traditional Retirement Options
Are Becoming Less and Less Reliable

I have been writing extensively on the state of Social Security lately. And for good reason — by all measures, its long-term viability is becoming less and less certain. [Editor's note: See Nilus' latest article on Social Security here.]

Already, this year, the system is taking in less than it pays out in benefits (once you exclude the contribution of IOU interest, which is largely an accounting construct). It’s the first time this has happened since the 1980s.

And while we may see a temporary rebound back into a surplus for the next few years, even the system’s Trustees expect a PERMANENT shift to less money coming in than goes out just seven short years from now. Even worse, by 2037, Social Security will only be able to pay out 78 percent of the benefits it’s currently promising us.

Will Washington eventually get around to addressing this massive — and growing — problem?

My guess is that they will come up with yet another temporary solution just as they did in the 1980s. And you can bet that it will consist of both higher taxes and lower benefits for many Americans.

That’s an especially scary scenario when you consider the fact that, in 2009, the average benefit check was just $1,153 a month … clearly not enough to pay ever-mounting costs for energy, healthcare, food, and more.

Meanwhile, corporate pensions are becoming a thing of the past. Existing plans are failing or cutting their promised benefits. And the government’s backup plan — the Pension Benefit Guaranty Corporation — is also underfunded to the tune of $22 billion right now

The End Result: We’re On Our Own
When It Comes to Retirement Security
And the Need for Supplemental Income

Am I saying that you won’t receive anything from the traditional sources? Absolutely not!

In fact, I think current retirees and near-retirees can use some relatively simple steps to boost the payments they will receive from Social Security. And many defined benefit plans will continue to provide promised benefits, too.

At the same time, I don’t think any of us — no matter where we’re at in life — should solely depend on any of the traditional retirement standbys.

Instead, we should save more on our own, and invest wisely so that we’re prepared no matter what happens next.

And in my opinion, dividend-paying stocks are a great cornerstone for just such a purpose …

Why?

1. Even conservative companies like Altria (formerly known as Philip Morris) are currently yielding six or seven times as much as you’d get from a CD or money market …

2. By their nature, these firms tend to perform well whether the economy is weak or strong, whether deflation or inflation is in the driver’s seat …

3. Not only do dividends represent non-refundable returns on your investment, but they are also immune to the accounting shenanigans that make corporate earnings reports so suspect these days …

4. Many conservative dividend-paying companies have been lagging the broad market’s sharp rebound off the March lows, which makes them even better values at the moment …

5. Unlike bonds, your yield isn’t fixed upon purchase — if a company continually increases its dividend, your effective yield rises and rises …

6. And historically, dividend-paying stocks have lost far less than non-payers during market declines, providing additional peace of mind!

For example, back in 2002, the S&P 500 had a rough year … declining about 20 percent. Non-dividend stocks in the index fared even worse, losing about 30 percent of their value that year. Meanwhile, dividend shares in the index fell only 11 percent over the same period.

The same relationship prevailed during 2008, too — with dividend-paying stocks outperforming non-payers by about six percentage points.

In Fact, the Very Best “Dividend Superstars” Produced
Positive Returns Even During the Recent Bear Market!

It’s no secret that this most recent bear market was the worst since the Great Depression, and that nearly all assets got clobbered along the way. But get this …

I first recommended the aforementioned Altria in the very first issue of my Dividend Superstars newsletter, back in July 2007. (Remember, that was pretty much the top of the market!)

Well, from the date of that initial recommendation through the end of 2009, Altria’s stock produced a total return — capital appreciation plus dividend payments — of 10.35 percent.

And over that same time period, the S&P 500 has LOST 26.61 percent, including dividends!

Meanwhile, as I mentioned a moment ago, the shares are still currently yielding a whopping 6.8 percent … from a dividend that I consider very safe.

Altria is certainly not the only example I could cite today. In fact, the total of all of my recommendations in Dividend Superstars — including open and closed positions, winners and losers — has produced a moderately positive result since I launched the service (kicking off $6,179 in dividends). Again, while the S&P 500 fell 26.6 percent!

You’d be hard-pressed to find any stock mutual fund that even beat the stock market by a few percentage points over that period, let alone one that had a positive result.

And while stock selection certainly played an important role in my newsletter’s strong showing, I believe the bigger key to our success was the undeniable power of steady dividend payments.

So as you think about the many challenges that loom ahead, especially the uncertainty of the “old school” retirement solutions, please remember that one oft-forgotten standby continues to provide hope where nearly all others are failing.

Here’s to the lowly dividend payment, and its ability to sustain income-starved investors for many years to come!

Best wishes,

Nilus

P.S. If you’re not yet a Dividend Superstars subscriber, consider subscribing today. At just $69 for a full year, it’s a heck of a bargain. Plus, if you act now, I’ll also send you a bunch of profit-packed special reports absolutely free of charge. Click here for all the details.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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