Taking Stock

Tony Crowell

Show Me the Dividend

Dividends have always been an important factor in successful investment returns. They seem likely to become an even more significant part of future returns. The stock market is subject to swings from emotion and periods of overconfidence have often pumped up stock prices of companies with little prospects of paying out cash to their creditors, much less their shareholders. Even successful companies have often also favored stock buybacks instead of sharing their cash with their shareholders.

Two major factors are changing the stock marketplace today. One is the aftermath of the financial crisis that left many investors with a nervous attitude of “Show me the money.” The second is the continuing record low levels of interest rates on bonds and similar more plodding investments.

The yield on 5-year U.S. Treasury bonds is currently less than 1%. In contrast, IBM (IBM-$206), which just increased its dividend for the sixteenth straight year, yields 1.5%. Trying to look five years ahead, always a good exercise, I cannot imagine any realistic circumstances that would provide a greater return on the bond. Anyone obsessed by the greater certainty of the bond would probably be better off investing in both IBM and some sessions of personal psychotherapy.

Exxon Mobil (XOM-$86) increased its dividend for the twenty-ninth straight year and now yields 2.6%, almost as much as a 30-year Treasury bond. Its new total annual dividend payments of $10.7 billion make it the world dividend leader. AT&T is second. Surprisingly, next with $9.9 billion is a new contender, Apple (AAPL-$607). Its new dividend of $2.65 quarterly initiates a 1.7% yield.

Apple is an increasingly respected company and its example may inspire others like Amazon or Google to consider initiating dividends. I would certainly not rule out non-dividend payers (which would have ruled out Apple) but favor growing companies that show their regard for their shareholders by including them in the growth with payouts.

Intel (INTC-$28) is exemplary with a 3% yield and eight years of increases. Staying in this increasingly popular tech sector, Qualcomm (QCOM-$64) and Broadcom (BRCM-$36) offer yields over 1%. They are both major suppliers for Apple’s newest products.

Digital Realty Trust (DLT-$74) owns and operates over 100 data centers in 31 countries. Its recent quarterly report showed steady growth; it also increased its dividend. The yield is now 4% and it has bumped the dividend for the last six years.

The financial sector used to be a leader in dividend payments but it lost that position abruptly during the financial crisis. Citigroup is a particular embarrassment. It paid its first dividend in 1813 but has been able to keep that 200-year streak alive only by cutting the current dividend to a penny every quarter.

Aflac (AFL-$45), which sells supplemental health insurance in the U.S. and Japan, popped three points on its quarterly report, which trumped Wall Street forecasts. This is an excellent stock for retirement accounts with a 3% yield and dividend increases for twenty-nine years. Earnings growth is steady but not flashy and it is selling for only seven times earnings.

ACE Limited (ACE-$76), a global Zurich-based insurer and reinsurer is my newest addition. Like Aflac, its stock is reasonably valued and its current 2.2% yield has sound prospects for increases. Its CEO is Evan Greenberg, who worked 25 years at AIG for his father, the notorious “Hank” Greenberg. (“Hank” is believed to have modeled his management style after General Patton.)

Evan’s older brother, Jeffrey Greenberg, also worked for their father at AIG before resigning and joining Marsh & McLennan, the large insurance broker. “Hank” was forced to resign from AIG during the financial crisis and Jeffrey from Marsh & McLennan, each after allegations of various financial improprieties by then New York Attorney General Eliot Spitzer. Later, Mr. Spitzer also resigned (after being elected Governor) following admissions of diverse personal improprieties. Only Evan survived this turbulent period and the company he heads is doing well.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com


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