Investors Should Appreciate Dividends

Standard & Poor’s recently projected that dividend payouts will fall by 13.3% this year. That’s the biggest drop off in dividends since 1942. We’ve already seen several major companies slash their dividends in an effort to cut costs. JPMorgan Chase (JPM) lowered its dividend by 87%. General Electric (GE) announced its first dividend reduction since the Great Depression. Yesterday, PNC Financial Services Group (PNC) said it will cut its dividend by 85%.

Personally, I love dividends and I encourage all investors to cultivate their love and respect for dividends. Dividends do two important things. First, a generous dividend payment lowers a stock’s volatility. I’d much rather own a stock that’s stable rather than one that scatters all over the place. At Portfolio Grader, my Quantitative Grade is based on a stock’s potential growth compared with its volatility. That’s why more stable stocks tend to get higher scores.

The other benefit of dividends is that they tell me how much money a company really has. I’m a former accountant and I know that companies can legally report their earnings in a hundred different ways. Sometimes, it’s almost impossible to figure out just how much a company earned last quarter. But if the company is willing to part with cash in the form of a dividend payment, then I know they really earned it.

I particularly like stocks that have increased their earnings for many years. Standard & Poor’s tracks an elite club which they call their Dividend Aristocrats. To be a member, you’ve had to increase your dividend for 25 straight years. As you can imagine, it’s a hard club to get into.

Fortunately, in my Blue Chip Growth Letter, I recommend three Dividend Aristocrats. The stocks are Abbott Labs (ABT), McDonald’s (MCD) and Wal-Mart (WMT). Abbott currently yields 3.4%, McDonald’s yields 3.8% and Wal-Mart clocks in at 1.9%. All three are excellent buys right now.

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