The Long-term Allure Of Dividends

These are heady days for dividend lovers. Dozens of companies with excellent track records are providing investors with annual payouts that exceed yields on five- and even 10-year Treasury bonds. Yes, Treasuries may be safer, but dividends tend to rise over time. Plus, when your T-bond matures, you simply get back its original face value—unlike stocks, which can appreciate.

- James K. Glassman

For example, the 10-year Treasury bond yields 2.59%, but PROCTER & GAMBLE (SYMBOL PG, $102), a member of the Kiplinger Dividend 15, the list of our favorite dividend-paying stocks, yields 2.8% and has increased its dividend for 62 consecutive years. COCA-COLA (KO, $45), which said in February that it was raising its dividend for the 55th year in a row, is yielding 3.5%. (Prices and returns are through March 15.)

But are dividend-paying stocks really superior? Had you invested solely in stocks that make regular payouts to shareholders, you would have missed some of the market’s biggest successes. Alphabet, Amazon.com, Berkshire Hathaway and Facebook—four of the six largest companies by market capitalization—pay no dividends.

Rather than handing money to their shareholders every few months, fastgrowing companies often invest their profits in their own business—in new factories or software, as Amazon has done in building its cloud-computing subsidiary, or buying complementary firms, as Alphabet (then called Google) did when it bought YouTube.

Warren Buffett, chairman of Berkshire, likes collecting dividends from the companies he owns, but he never pays them himself. He wrote in 2013, “Our first priority with available funds will always be to examine whether they can be intelligently deployed in our various businesses…. Our next step … is to search for acquisitions unrelated to our current businesses.”

You might consider dividend-paying a kind of failure of imagination by management. Why, then, has a particular kind of dividend-paying stock become especially popular in recent years? I’m talking about the stocks of companies, such as Procter & Gamble and Coca-Cola, that increase dividends year after year.