YOUR MONEY. What Do Dividends Tell You? by John Buckingham (NAPSA)—Investing in stocks that offer a significant dividend can be a strategy that paysoff in more ways than one. It may surprise many investors to learn that in the past 15 years, the largest dividend- paying stocks posted superior returnsrel- ative to the mar- Buckingham ket—and to their non-dividend-paying peers. And they tended to do this while offering lower levels of risk. Surprised? During the time of the “bubble”—1999 in particular— the largest non-dividend stocks outperformedthe dividend payers. However, when the market turned south in 2000, the lower volatility associated with large-cap stocks started to work in their favor. Since the end of March 2000, large-cap dividend payers as a group lost 1 percent annually, compared to 18.2 percent lost by non-dividend payers annually. That’s just slightly less than the tech-heavy Nasdaq which lost 18.5 percent. Extending our analysis to mid- cap stocks that paid solid dividends over the same period, we found a similar—althougha less dramatic—pattern of strong returns and lower volatility. Whenwestarted to look for reasons behind the pattern, we found what we believe is a relationship between dividends and volatility. Volatility is a measure of a stock’s tendencyto have sharp price swings within a period of time—andis often used by investors and analysts to measurerisk. It’s our belief that dividends, in addition to being part of the When a company pays dividends, it can be a sign of stability and that management believes increased earnings lie ahead. return to investors, are an indica- tor of stability—andless volatility. In general, companies begin to pay dividends once they reach a level of business maturity, where attractive opportunities for invest- ment may be less available while cash flow is stable or growing moreslowly than in the past. Dividends convey information. They suggest that a company’s leadership is assured of a sustainable increase in earnings. Webelieve the characteristics associated with dividend-paying large-cap stocks— market-beating returns, dividend income and lower volatility—make a com- pelling case for an investment strategy based on holding select group of dividend-paying stocks for five to 10 years. John Buckingham is president, chief portfolio manager and direc- tor of research for Al Frank Man- agement as well as editor of “The Prudent Speculator” newsletter. To learn more, call 1-888-9946827 or visit the Web site at www.alfrank.com.
