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Super-Sized Dividends For The Long Haul

Posted: Nov 23, 2009 10:30 AM by Sham Gad

Tickers in this Article: GE, VZ, T, MMP

As companies do everything they can to eliminate costs, dividends have not been spared. In fact, according to Fortune, 74 companies in the S&P 500 index have cut $48 billion in dividends in 2009, the highest amount in any given year. Names that have been traditionally known as the stable dividend payers, like General Electric (NYSE:GE), have reduced dividends this year. There are a surprising few names that continue to pay extremely attractive yields.

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Dividends Matter
Companies with long-term dividend track records often represent strong quality businesses that can be counted on to increase in share price over a long holding period. A study by Ned Davis research suggests that this is indeed true. Since 1972, companies that pay dividends have returned 9.2% per year versus 6.8% return per year for the S&P 500. That 2.4% difference over the past 26 years is a life changing number. A $10,000 investment at 6.8% for 26 years produces $55,316. At 9.2%, the same original sum is worth $98,580. (For more, see The Power Of Dividend Growth.)

Telecom Yields
When examining a company's dividend payment, two things matter most: the history and stability of the payment and the dividend coverage ratio - EPS divided by dividend per share. Consider Verizon Communications (NYSE:VZ) which currently yields 6.30%, the result of $1.90 payout against a share price of $30. EPS currently covers the dividend one to one, but Verizon's expected future growth should provide greater coverage. Even rival AT&T (NYSE:T) is worth a look for income-oriented investors as it currently yields 6.2%, paying $1.65 a share against its most recent annual EPS of $2.02

Energy Infrastructure
Magellan Midstream Partners (NYSE:MMP) is an energy infrastructure limited partnership that owns over 9,000 miles of pipelines. It pays $2.84 for a yield of 7.1% against EPS of $2.91. Energy pipelines are like monopolies: once you build them, no competitor wants to expend the time and capital to compete right next to you. This gives pipeline operators great long-term earnings stability which is good for the share price and payout amount. (For more, see Dividend Yield For The Downturn.)

Bottom Line
When it comes to dividends the numbers speak for themselves. And decades of data have shown those numbers to be quite compelling. (For more on this subject, see Dividend Facts You May Not Know and The Importance Of Dividends.)

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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