If I were a dividend, Id fire my press agent. Id
be jealous and feel neglected because stock prices get a lot
more attention than they deserve. The only time dividends make
headlines is when they get reduced, because dividend cuts (or
omissions) often go hand in hand with stock price declines. The
stock is a victim; the dividend is the bad guy.
But if I were a dividend, Id be more upset because I
never get the credit I deserve. Over the past century dividends
delivered close to half of all stock market returns. Think
about that. If you were fortunate to be alive for the past 100
years and had your money invested in the stock market, half of
your returns would have come from dividends.
However, the above statement needs an important
clarification: It sometimes takes decades for investors in
broad stock market indexes to obtain average
returns. Historically, the stock market has gone through
exciting phases of above-average returns (secular bull
markets), which were usually followed by less satisfying phases
of below-average returns (secular sideways markets), each
lasting about a decade and a half.
I have written about why my research leads me to believe we
are in a long-lasting sideways market. During the past three
sideways markets, dividends were responsible for more than 90
percent of stock market returns. Yet the current dividend yield
of the S&P 500 index is only 2.1 percent, less than half of
what stocks yielded, on average, over the past century.
A few months ago a client asked my firm if we could come up
with a defensive stock portfolio that would yield more than 7
percent. In an environment in which the Federal Reserve has let
loose a jihad on interest rates and carpet bombed anything even
remotely resembling yield through its purchase of riskless (or
near-riskless) instruments of all durations, I thought it was
not doable. Most stable, income-producing assets (I am not even
talking about bonds), such as real estate investment trusts,
yield a miserable 3 percent or so and are likely to be
candidates to short, not buy, in the long run.
To my surprise, we have been able to identify a diversified
portfolio of 20 stocks that meet the 7 percent hurdle. We have
had to step outside the U.S. of A.: Half of the portfolio is in
European (mostly multinational) stocks, a quarter is in master
limited partnerships, and the rest is in plain-vanilla U.S.