Dividends Power the Spike in Personal Income

 | Jan 31, 2013 | 10:23 AM EST
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This morning's personal income report was a shocker. It showed the highest increase in personal income in eight years. This is great news, but if you look deeper into the report, you'll see that most of the gain in personal income was due to a humongous, 16.7% ($123 billion) increase in dividend income. That means investors who owned stocks saw their incomes surge enormously compared with people who didn't. Just by comparison, the gain in private wages was a mere 1.1%.

We know that the fourth-quarter dividend surge was largely tied to companies paying out ahead of the tax increases that will go into effect this year. OK, so in some sense it was an aberration. However, looking back over the past three years, dividend income has risen faster, percentage-wise, than any other component of personal income. Dividends have shown an average growth of 4.4% annually since 2010, while private wages have increased an average of only 1.1%. And if you're wondering about interest income, that has declined 0.3%.

In other words, if you've been relying on interest income to make you rich, you're getting hosed. You can thank the Fed for that. As an aside, I find it odd that people still refer to the Fed's monetary operations as "stimulus," even though what it effectively does is strip the private sector of income.

So what's the takeaway from all this? The bottom line is that you have to own good dividend-paying stocks. That's the only way you're going to see your income rise, now and in the future. This trend is here to stay; I can say this without hesitation.

As companies seek to become more productive, there will be constant downward pressure on wages. Moreover, the sequester is about to hit, the government is about to embark on a program of austerity, and the contribution to income from government transfer payments (Social Security, Medicare, unemployment insurance) is likely to go down. On the other hand, corporate profits have been rising to record highs, and this is likely to continue, supported by favorable business policies that have to do with wages, taxation and trade. Rising profits will mean rising dividends, you can be sure.

Right now, the stock market rally seems a bit stretched. We're close to an all-time record on the Dow, and I can easily see that happening. But over the next several weeks we may get a correction, perhaps a nasty one, and if that happens, consider it a gift. It would be a prime time to dive in and scoop up some high-quality companies that pay dividends. These companies should be considered the "new gold."

In fact, they're better than gold, because they pay dividends, and like I've said many times, gold pays you nothing. It's a fool's game. No investor should be without good dividend-paying stocks for one simple reason: Our policy makers have fashioned an environment that pretty much ensures you'll see a rising stream of income for years to come.

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