Wall Street is a place where trends can cycle nearly as fast as they do in the fashion world, but in the post-bubble years, investors are treating dividend stocks like the always-flattering basic black.
To meet the demand from dividend-hungry investors, 24 equity income funds have been launched since the beginning of 2003 (out of a total of 240 new funds), according to Lipper. Inflows have been “robust,” says Tom Roseen, senior research analyst at Lipper — about $7.2 billion into U.S. equity income funds, which have a current combined value of about $158 billion.
More evidence of the popularity of dividends: Earlier this year, Standard & Poor's launched the S&P 500 Dividends Aristocrats Index, which tracks the performance of companies that have consistently increased dividends every year for at least 25 years.
No wonder investors are enamored. Last year, the iShares Dow Jones Select Dividend Fund, for example, increased 17.9 percent, about 7 percent better than the S&P 500. As of early September, it was up about 5 percent, nearly double the S&P 500 index. Dividend-payers are outperforming nondividend-payers on a marketwide basis. According to Standard & Poor's, dividend-payers are up about 4.5 percent year to date, compared with 2.9 percent for nondividend-payers.
“I believe that we are in the beginning of a secular story that's going to last 10 or 20-plus years,” says Neil McCarthy, chief investment officer of OFI Institutional Asset Management, and manager of the Oppenheimer Dividend Growth Fund, which was launched in July. “Dividend stocks have been acting well, and part of that has to do with the difficult market environment, with investors looking for a place to hide and fulfill some income needs.”
Though investors during the bubble years may have thought little about getting an extra 1 percent or 2 percent in dividends on stocks, it's a stingier world today — one in which that extra point or two can make a big difference. Investors are now focusing on the long term, money managers say, and dividends play a big part in long-term gains. Since 1926, dividends have historically represented about 43 percent of the returns generated by the S&P 500, according to Ned Davis Research.