Monday, December 20, 2010

Schreiber and Stroik, All About Dividend Investing

What’s all the fuss over dividends? Do they really make that big a difference? In All About Dividend Investing, 2d ed. (McGraw-Hill, 2011) Don Schreiber, Jr. and Gary E. Stroik argue that they make a huge difference. In a classic dividend story they compare the portfolios of twins who were each given $10,000 in 1944 to invest in companies that made up the Dow Jones Industrial Average. The twin who spent his dividends each year had a portfolio worth $767,000 in 2009; he spent more than $370,000 in dividend income from 1944 through 2009.The conscientious twin reinvested his dividends until he retired in 1984 and needed his dividend income to help support his lifestyle. By the end of 2009 his portfolio was worth more than $4.7 million, and since 1984 he had collected more than $1.7 in dividends. So the first twin realized a little over $1 million from his initial gift; the second, about $6.5 million.

Dividend stocks are often recommended in down cycles. In the particular cycle the authors picked (or cherry-picked) $100,000 invested in the DJIA Index in 1966 would have declined to $90,275 by 1981. Had a person reinvested dividends, thereby acquiring more shares as prices were falling, the account would have been worth $186,661 in 1981. And had he taken his dividends in cash, he would have received $64,978 over those years; instead of losing $10,000 he would have netted about $50,000.

In bull markets dividend-paying stocks may underperform the more speculative non-dividend-paying growth stocks (in 1999 the NASDAQ gained 85% while the DJIA advanced only 25%). But with dividends reinvested the return would have increased substantially. An investment of $100,000 in the DJIA in 1982 would have been worth $1,302,760 at the end of 1999; with dividends reinvested, the value would have been $2,056,109.

The authors are writing for the relatively uninformed investor. They offer basic advice on how to screen for stock candidates and how to rank them. They outline alternatives to individual stocks such as folios, ETFs, and mutual funds. They explain simple risk management techniques and write about the current tax treatment of various kinds of dividends.

All About Dividend Investing is a good book for investors who are planning for their retirement needs, although it may not take the place of a financial planner. It offers a model portfolio: 70% dividend payers, 14% tactical choices, 14% noncorrelators, and 2% cash. Within the dividend payers segment the allocation is equally divided into five slices: value, growth, quality, yield, and overall best. But then the reader has to get down to work to find the right stocks to plug into these slices. Otherwise, he can use what he learned to find the right advisor for his needs.

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