Dividend Paying Stocks: Lower Risk, Higher Returns

Dividend paying stocks have been shown to provide higher investing returns with less risk than do their non-dividend paying counterparts over the long-term. All other things equal, the longer the investment period, the greater the out-performance. Of course, this is dividend paying stocks and non-dividend paying stocks as groups; there will always be exceptions on the individual stock level.

Higher Returns on Dividend Paying Stocks: Show me the Stats!

There’s a ton of research showing that pitting a portfolio without dividends against one with dividends over just about any longer-term period is akin to throwing yourself into a tank with Jaws.

Sink your teeth into these stats:

• Between 1972 and 2010 (CHART DATA)–Dividend Growers and Initiators in the S&P 500 returned 9.6% per year, dividend payers with no growth (in dividends) returned 7.4%, while non-dividend payers returned 1.7%. The fact that stocks with the highest yields (top 20 percent) lost 3.0% per year is discussed in the last section. (Source: Ned David Research)
• Between 1999 and 2010–The median return from all stocks with a market capitalization above $1 billion was negative 3.2%, whereas the median return from stocks with a market cap above $1 billion, plus a dividend yield of 3% or more, was 28%.  And that’s before adjusting for dividend returns. (Source: Motley Fool)

Dividend Paying Stocks = Lower Risk

Demonstrating dividend paying stocks’ overall lower risks isn’t as straightforward as demonstrating their higher returns.

We’ll keep things simple here:

For our purposes, a stock’s or a portfolio of stocks’ beta is indicative of its risk in terms of stock price fluctuations. The U.S. stock market is the benchmark, with a beta of 1.0. A stock with a beta of 0.5 has half the volatility of the overall market, and one with a beta of 2.0 has twice the volatility. Betas are published on all the major investing sites.

Dividend paying stocks generally have lower betas than do comparable non-dividend paying stocks. Utility stocks have some of the lowest betas around.

High Dividend Paying Stock Industries

Industries that contain many high dividend paying stocks include:

• Utilities: Electric, Gas, Water
• Integrated Oil & Gas Companies
• Drug Manufacturers
• Food Manufacturers
• Beverages–Soft Drinks
• Beverages–Alcoholic
• Tobacco Product Manufacturers
• Gaming (gambling)
• Telecommunications
• Banks
• Real Estate Investment Trusts (REITs)
• Large, mature companies in various industries

This list is not all-inclusive, as there are mining stocks, various energy stocks and others that pay high dividends as well.

Banks and other financial services stocks, as well as REITs, are not only very cyclical, they’re tricky to analyze. Most investors should probably steer clear.

Top Dividend Paying Stocks

Here’s a sprinkling of some dividend paying stocks (with ticker symbols). The list is meant to provide an idea of dividend yields and betas by industry type; it should not be considered a recommendation to buy these stocks.

Top Dividend Paying Stocks: Water Utilities

• American Water Works (AWK)–3.2% dividend yield (0.41 beta)
• Aqua America (WTR)–3.0% yield (0.16 beta)

Top Dividend Paying Stocks:  Electric Utilities

• Brookfield Infrastructure Partners (BIP)–5.2% yield (0.78 beta)
• Southern Company (SO)–4.7% yield (0.31 beta)

Top Dividend Paying Stocks: Integrated Oil & Gas Companies

• Exxon Mobile (XOM)–2.5% yield (0.40 beta)

Top Dividend Paying Stocks:  Healthcare Sector

• Abbott Labs (ABT)–3.8% yield (0.30 beta)
• Johnson & Johnson (JNJ)–3.5% yield (0.62 beta)

(Drug manufacturers pay dividends currently averaging 4-5%. However, many of the large drug companies’ best-selling drugs are now coming off patent protection, meaning revenue likely will be lost due to competition. Scrutinize this factor before investing in these stocks.)

Top Dividend Paying Stocks:  Food & Beverages Industries

• Unilever (UL)–3.8% yield (0.77 beta)
• Coca-Cola (CO)–2.8% yield (0.57 beta)

Sin Stocks

One person’s enjoyment is another person’s sin–if your idea of a good time includes rolling the dice, while downing a cocktail and perhaps puffing away, there are a variety of stocks suited for you, too. Stocks of companies in the tobacco, alcoholic beverage, “gaming” (gambling) and defense industries are often referred to as “sin stocks.”

Sin stocks, in particular the tobacco stocks, typically have relatively high dividend yields. Some people may take issue with investing in sin stocks, while others may have no qualms.

A Word of Caution

While dividend paying stocks as a whole are less risky than non-dividend payers, the “highest” dividend payers (top 20% yields) are generally more risky.  Briefly, companies with higher risks often have to pay hefty dividends in order to compensate investors for the increased risks they’re taking on. Their payout ratios (percentage of profits paid as dividends) often tend to be too high, and unsustainable.

This article is not meant as a recommendation to buy or sell any securities. The writer does not have any positions in any of the stocks mentioned.