TMFDeej (99.47)

Good article, TERRIBLE title

February 11, 2009 – Comments (4) | RELATED TICKERS: BP , MO , VOD

This month's issue of Smart Money magazine came in the mail yesterday.  It contained an article on dividend paying stocks that I found extremely interesting, but the title for the article that Smart Money plastered in huge letters on the front of the magazine was absolutely TERRIBLE.  Ready for it?

"GET A SURE 7%"

Uh guys, nothing in investing is ever sure.  They should know better than to print something like that.  I would have had much less of a problem with the piece if it was titled "Get a Solid 7%" or "Get a Relatively Safe 7%," but the word "SURE" is very, very misleading.

Anyhow, despite its less than desirable title, the piece contains a ton of amazing statistics, including the following:

- While the S&P lost 9% (including reinvested dividends) over the past decade, the index's dividend aristocrats gained 44%.

- Dividends have historically accounted for more than 40% of the gains in the S&P 500.

- The S&P 500 companies that pay dividends outperformed the total index by 6% in 2008 (I know they still produced still a terrible return)

- A $10,000 investment in the S&P 500 dividend paying companies in 1972 would be worth $160,400 today.  Compare this with $89,000 for the market as a whole and an unbelievable $800 (yep, that's it) for money invested in non-dividend paying companies.

I strongly believe that investments that pay you to hold them, like common stock with solid dividends and low payout ratios, preferred stock, and bonds will significantly outperform the overall market for the next several years.  That's where I've been putting my money.

For those who are interested, the specific companies that Smart Money recommended in the article are:

BP - Dividend Yield: 7.3%

Altria (MO) - Dividend Yield: 8.1%

Vodafone (VOD) - Dividend Yield: 6.8%

PPG Indistries (PPG) - Dividend Yield: 5.4%

Bristol-Myers Squibb - Dividend Yield: 5.4% (BMY)

I like some of the companies on this list.  I am long Altria in real life and long Vodafone / Bristol-Myers Squibb in CAPS.  I am staying far away from BP and PPG because I believe that their businesses will be much more impacted by a prolonged recession than the other three companies' businesses.  While their dividend coverage is great right now, I could easily see BP and PPG eventually having to circle the wagons and cut.

Even the companies that I like can never be considered a sure thing.  Big Mo is exposed to higher cigarette taxes, lawsuits, and a crunched consumer.  Vodafone could be negatively impacted by a long global recession as well.  And pharma companies are always open to all sorts of patent expirations, lawsuits, and regulatory issues, etc...

On a related note, the first IPO of the year in what has been an unbelievable drought for them is actually a spin-off from the aforementioned Bristol-Myers Squibb.  The company is spinning off its Mead Johnson Nutrition unit, the maker Enfamil brand baby formula (as the father of two sons, I am familiar with the product).  It will trade under the ticker symbol MJN.

I've always had a soft spot in my heart for spin-offs.  I plan to keep a close eye on this one.  One thing that I like about it already is that MJN plans to pay a $0.20 quarterly dividend.  I'm not sure where it will open trading, but that will likely represent in the area of a 3.0% to 3.5% yield.  Not too shabby.

Deej

Long MO