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Dividend stocks: Still your best bet
Despite the dividend depression we've just been through, you're still better off with stocks that pay you to own them.
[Related content: stocks, investing strategy, funds, dividends, bonds]
By Jeremy J. Siegel, Kiplinger's Personal Finance
The past year was a tough one for stocks that pay dividends. Through the first 11 months of 2009, non-dividend-paying stocks in the Standard & Poor's 500 Index ($INX) left dividend payers in the dust. What’s more, a record 78 companies in the S&P index either reduced or suspended their dividends.
Nevertheless, the evidence is overwhelming that dividend-paying stocks are still your best long-term investment. Through the years, diversified portfolios of stocks that pay dividends have not only beaten those that don't but have also handily outperformed the S&P 500.
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Here's an illustration of how dominant dividend payers have been over the long run. Starting with Jan. 1, 1957, I sorted the index's 500 companies by their dividend yield, going from highest to lowest. Then I recorded the return on the top 100 dividend yielders versus the bottom 100 and repeated this exercise for every year.
The result? The top dividend yielders are hands-down winners. If an investor had put $1,000 in a portfolio of the 100 highest-yielding stocks on Jan. 1, 1957, by Dec. 1, 2009, he would have accumulated more than $450,000 (assuming all dividends were reinvested).
That’s a hefty annualized return of 12.5%, an average of almost 2.5 percentage points per year greater than the return on the S&P index. That same $1,000 invested in the 100 lowest-yielding stocks returned only 8.8% per year.