Time to Switch to Dividends?

The best place to beat inflation in this market is and remains with global dividend payers, says Jim Fink of Investing Daily.

Money manager James O’Shaughnessy recently wrote that in the 30-year period between 1951 and 1981, US annual inflation rose from near zero to 13.5% in 1980, averaging 4.3% along the way. During this period, stock returns handily beat inflation, whereas intermediate and long-term bond returns lagged behind miserably.

Since 1790, the US ten-year Treasury note yield has averaged in excess of 3.5% (and rose above 15% in 1981), so today’s yield in the 1.7% range has a long way to go up—which means that prices have a long way to go down.

As O’Shaughnessy explains: “For long-term Treasuries, a 1% rise in interest rates would result in an approximate 20% decline, the equivalent of almost seven years worth of income at current yields.”

The lowest-risk investments are those that are currently trading at valuations near their historical long-term average yields—rather than at yields far below average. According to O’Shaughnessy, only "dividend-paying equities” are currently trading near their long-term average yield. Everything else (all forms of fixed income, preferred stock, and REITs) are grossly overvalued based on yield.

Although investors will do okay investing only in US dividend-paying companies, what’s really interesting is the vastly improved performance that can be achieved by adding foreign dividend-paying stocks to the mix.

US dividend stocks have historically outperformed, so foreign dividend stocks must be true superstars if they have historically outperformed the US dividend-paying outperformers.

From 1970 to 2012, an investment in the top decile of dividend-yielding stocks in the global markets would have outperformed their high-yielding US counterparts by 6.3% per year (annualized)—a nearly 52% greater average annualized return—with a better risk-adjusted return. And in the 481 rolling three-year periods since 1970, global dividend yield outperformed US dividend yield 73% of the time.

At the end of 2012, US stocks were more expensive (higher P/E ratios) and lower-yielding than all other global regions except Japan.

Lastly, annualized corporate earnings growth between 2000 and 2011 was much higher outside of the US (10.4%) than in the US (5%). The end result is a multitude of reasons to add foreign dividend-paying stocks to your portfolio:

• Lower valuations
• Higher earnings growth
• Higher dividend yields
• Long-term historical total-return outperformance

I screened for small- and mid-cap stocks using the following strict criteria:

• Market capitalization between $250 million and $5 billion
• Regular dividend yield of 3% or more (ignored special dividends)
• 5-year, 3-year, and 1-year dividend growth
• 6-year stock price appreciation greater than 15%
• Debt-to-equity ratio 70% or lower 

10 Global Small/Mid Caps with 3%-Plus Dividend Yields

Read more from Investing Daily here...

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