A Decade for Dividend Stocks

 | May 21, 2014 | 2:00 PM EDT  | Comments
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Former Federal Reserve Chairman Ben Bernanke recently opined that he doesn't believe the U.S. economy will see a 4% Federal Funds during his lifetime.

Unless Bernanke is terminally ill, his view is that it could well over a decade or more before those types of interests rates are here. His statement may sound extreme but keep in mind it took over 30 years for interest rates peaks in the 1980's to get to a zero fed funds rate.

Whether Bernanke is accurate or not, it's quite possible that this is the era of historically-low interest rates. What that is going to mean is a fundamental way in how people save. Earning 5% a year interest from a bank is not going to happen. A lot of people do not want the "risk" they still see in equities, except for perhaps one class of equities -- the high quality dividend payers.

Today, you have highly stable, well-capitalized organizations paying 3% or more. Held for a period of many years, these securities are likely to also grow by 3% to 6% a year, creating a very respectable total return even for the most conservative of investor. But here's the deal -- as more people gravitate towards them, these stocks may advance even more. Also, most habitual dividend payers also tend to increase the dividend over time, thereby increasing the true yield on one's cost basis.

I love to use the example of Warren Buffett's investment in Coca Cola (KO) back in the 1980's. By my rough math, the dividend that Buffett's Berkshire Hathaway receives today from Coke equates to a near 40% yield on his original cost basis. Wow.

Speaking of Buffett, Berkshire just revealed that it had taken a stake in Verizon Communications (VZ), which yields 4.3% today. AT&T (T), which is hoping to acquire DirecTV yields 5%, respectively. Potash Corp (POT), one of the largest fertilizer companies in the world, yields 3.8%. Tech blue chips like Apple (AAPL), Intel (INTC), and IBM (IBM) all have quality yields that will likely grow in the future.

Dividend payers remain very fairly valued in today's market. As the market settles down, the hunger for yield should continue to increase. When taking into account total return, any quality company with a dividend is likely to offer very satisfactory returns for the remainder of this decade.

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