Dividends

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in"
John D. Rockefeller, founder of the Standard Oil Company
(Exxon Mobil, Chevron, Marathon, Amoco are successor companies of Standard Oil)

In The Future for Investors, Jeremy Siegel makes a point that stocks that pay dividends should be an integral part of an investors portfolio. I will not make a long term investment that does not pay a dividend. Current dividend yields in my portfolio range from 4.86% at Pfizer to 1.25% at AIG.

I am attracted to stocks that pay dividends for several reasons:

1) They produce income which I then reinvest.

2) The dividend yield helps put a floor on the stock during a down market. For example Pfizer's current yield of 4.88% is attractive to investors. With a yield of almost 5% chances are the stock price will not go down much further baring some bad news impacting Pfizer directly or bad news impacting the broad market overall. If you bought 100 shares of Pfizer today at $23.75, you would have invested a total of $2375. The current dividend amounts to $1.16 per share annually for a yield of 4.88%. Suppose further that the price of Pfizer begins a slow steady climb to $50 per share. Those who enter at that point receive a dividend yield of 2.32%. Although your stock is now worth $5000, you still have only $2375 invested and the yield of your actual investment remains at 4.88% as long as Pfizer continues to pay the same dividend.

3) Many companies have increased their dividend payout recently. In my portfolio Alcoa, Caterpillar, Exxon Mobil, American International Group, Pfizer, JP Morgan Chase, and Citigroup have all increased their dividend payout in the past year.

4)Dividends truly allow me to share in the profitability of a company. I prefer a company to pay a dividend rather than repurchase stock. When a company buys back its shares, an investor only profits when he sales his shares. As a long term investor what if I am not ready to sell my shares. For example company XYZ is going for $50 a share. If the company buys back 10% of its shares, theoretically the shares should go up 10% in price to $55 a share. The only way that an investor can reap that 10% is to sell his shares. If the company increases its dividend rather than repurchasing shares, the current shareholders will be rewarded for remaining as investors in the company. Some companies such as Exxon Mobil buy back shares as well as increase their dividend. Such as strategy allows an investor to share in the current profitability of a company in addition to allowing for the possibility of a nice capital gain when the investor does decide to sell the stock.

5) While they are taxed, dividends are currently taxed at 15% (historically the tax rate on dividends has been much higher).

6) Dividends reward the patience of the long term investor.