Saturday, November 12, 2011

Special Report: The Merits of Dividend Investing (TD Waterhouse)

Today, TD Waterhouse (Portfolio and Investment Research) has released its report titled, “The Merits of Dividend Investing,” in which TD analysts, Ryan Lewenza ( U.S. Equities ) and Martha Hill (Canadian Equities) dig into the merits of investing in dividend paying stocks by examining the positive return and risk attributes associated with dividend payers, as well as providing a list of some of their preferred U.S. and Canadian dividend paying equities.

Report Prepared by:

Ryan Lewenza, CFA, CMT
V.P., U.S. Equity Strategist

Martha Hill, CFA
V.P., Canadian Equity Strategist

Highlights:

• In this report we dig into the merits of investing in dividend paying stocks by examining the positive return and risk attributes associated with dividend payers, as well as providing a list of some of our preferred U.S. and Canadian dividend paying equities.

• Given our expectations for lower rates of return over the next few years, dividend paying equities could outperform with dividends likely to play a more important role in future total returns. As anecdotal evidence of this, we note that dividend payers within the S&P 500 Index (S&P 500) have outperformed non dividend payers by 5.50%, year-to-date. Looking at Canada (S&P/TSX Composite Index), the returns from dividend payers are even greater, outperforming non-dividend paying stocks by roughly 12%.

• Looking longer term, if a U.S. investor invested $100,000 in the S&P 500 in 1988 they would have roughly $527,974 today. That equates to a compound annual growth rate (CAGR) of 7.50%. However, if you include dividends over this period, an investor would have over $900,000, which equates to roughly a 10% CAGR. Similarly, Canadian investors who invested $100,000 in 1988 would have over $700,000 including dividends (8.9% CAGR) versus $397,000 (6.20% CAGR) if only looking at price return.

• When investing we also need to consider risk. On this front dividend paying stocks are generally lower risk stocks relative to non-dividend payers. We have found that the highest yielding stocks within the S&P 500 (4% and above) have the lowest betas (0.84 on average), which means they move less than the overall market. Conversely, stocks that do not pay a dividend or have a low dividend yield of less than 1% have higher betas than the market, at 1.23 and 1.31, respectively.

• Overall, our analysis shows that dividend paying stocks can enhance total returns for investors, with potentially lower risk.

The report is available here, or viewable/downloadable below.

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