Thursday, July 1, 2010

How to Make Big Bucks From Dividends


Image : http://www.flickr.com


It appears that someone is hiding something, and no, its not the Easter eggs all the little kids are searching for. US businesses are hiding enormous amounts of cash and if investors are diligent they can find these "cash cows" and milk them for all they are worth!

Interestingly, the companies in the S&P have a yield of 1.8%. They are sitting on more than $640 billion in cash that they need to do something with.

In the 1950s dividend yields on stocks regularly exceeded 8% or 10%, and this represented a bulk of the return investors recognized in their investments. In the early 1980s, stocks held a yield of over 6%.

Then something strange happened . . . . dividend yields collapsed and hovered around less than 1%. Some people thought it was due to the changing tax laws, and others believed it was a changing focus on investment strategies - a growing focus on capital gains as opposed to yields.

In 2000 dividend yields bottomed out at less than 1%. The government changed the tax laws yet again, making lower tax rates apply to dividends, and driving more companies to issue and increase dividends. 

Over the last few years dividends have climbed to their current state, however, the basic dividend yield doesn't tell the full story. Companies with tons of cash in hiding are using it to repurchase their stock.

Stock repurchases are a relatively new occurrence, which have found widespread acceptance in the in the last 30 years. Interestingly, the cash that would normally be used for dividends is now being earmarked for buybacks.

Savvy investors recognize this and they will incorporate the share repurchase into the dividend yield to determine the true return to an investor. With tons and tons of cash in "hiding", buying these stocks now is a great time to capitalize on two growing trends - the increase in dividends, and the continued push to repurchase shares! Focus on the S&P 500 and find those cash cows!

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