Don't Dimiss Dividends as Boring

 | Jul 15, 2013 | 4:00 PM EDT
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Most of us have heard about the immense value of stock dividends. It goes something like this: Over the past several decades of stock market returns, approximately 50% of those returns are a result of dividends. It's a powerful statement that holds a lot of weight because dividends are an immense source of capital appreciation.

But many skeptics point out that 2% to 4% dividend yields just won't cut it. They want growth, not boring dividends. I believe they are confusing the two categories.

Consider that Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) now collects a near 50% annual dividend yield from its investment in Coca-Cola (KO). When Buffett bought into Coke back in 1988, the shares were paying around $0.08 cents a share in dividends, yielding around 4%. Keep in mind that in 1988, 4% was not that enticing, as bonds and Treasury bills were paying double that. But over the past 25 years or so, Coke has increased its dividend payout by well over 1,000%.

So the magic of dividends to those doubters is not only the payout, but, more importantly, the growth of that payout. Thanks to Coke's juicy dividend growth, Berkshire rakes in a 50% yield on its original investment. And we think Buffett is crazy when he says he would hold Coke shares "forever."

Coke is perhaps the greatest consumer products company of all time, but others today give investors the opportunity to capture solid stable dividends along with a high degree of increased payouts. Thanks to the financial crisis, U.S. corporations are sitting a record amount of cash -- an amount in excess of $1.5 trillion. Capitalism is such that,  over time, some of that cash will find its way back to its rightful owners, the shareholders.

Procter & Gamble (PG) is an excellent candidate. Although the stock is trading at a 52-week high of $82, large shareholders, such as Bill Ackman, see more long-term upside. The current yield is 3% or $2.41 per share. Ten years ago, the dividend was $0.82 a share. Clorox (CLX) is another great name that yields 3.3% or $2.84 per share. Ten years ago, the payout was $0.88 cents a share.

The quality of these giant consumer brand names company is not going unnoticed today. Most of them currently trade on the high end of their historical price-to-earnings ratios (P/E). And, of course, price matters. The perfect time to buy these names was during the panic months of 2008 and 2009, but you don't need perfect prices to do well. Another market pullback could create better entry points.

Then you have the tech giants, many of whom are making that slow and painful transition from above average growth to annuity-like cash flow generation. Microsoft (MSFT) kicked off the dividend policy here several years ago. With billions and billions in cash coming in each year and no hope of investing it all attractively, that cash is going back to shareholders. Staring with an $0.08 yield in 2003, shareholders now get $0.92 a year. And, of course, there is Apple (AAPL), which clearly recognizes that it has more cash than most countries could even spend intelligently, so it's sending more and more back to shareholders via dividends and buybacks.

Next time you think about dividends, don't dismiss them as boring. Years from now, today's dividends will be anything but boring.

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