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November, 2005


Since we began investment articles here at "larvalbug bytes," there have been several pieces focused on equities with relatively high yields and reasonably low debt. Among those for which we have at least a year of subsequent share price records, 45 different stocks or real estate investment trusts (REITs) were recommended between November, 1999 and November, 2004. The period covered both a red hot bull market, when the average dividend of the S&P 500 Index had fallen to below 1.5% a year, and the most devastating bear market most of today's investors have experienced.

Though the S&P 500 Index stocks saw a higher dividend during the worst of the bear's attack, on average it still got no higher than about 2.1%. By now, as stock prices have again climbed, it is back below 2%, less than half its level in the 1940s. Since the dividend typically turns out to provide 40-50% of a stock's long-term total return, this historically low yield does not hold out great promise for further outstanding market-wide equity profits soon.

It seemed likely, however, that stocks and REITs with significantly higher dividends than that diminutive average might provide superior total returns.

To test this hypothesis, for each of the 45 cited high yield assets I have compared the performance of a 12-month-plus-one-day (to avoid short-term tax treatment) holding with that of a simple buy-and-hold purchase of the S&P 500 Index (SPX), held for the same period, and then added in the average dividend of the "high yielders," on the one hand, 5.2%, and the approximate S&P 500 Index dividend over the five year interval under review, 2%, on the other.

Even though some of the high dividend stocks lost considerably in share price, with one down over 90% and another over 80%, the majority did well enough in this rocky stock market that an average year-and-a-day holding in each produced an upward price performance of 5.1%, which favorably compares with a negative 0.6% average performance for the S&P 500 Index over the same periods.

Bearing in mind that at one point the S&P 500 Index was down 40%, and that most stocks were adversely affected by the overall market's tailspin, the better performance of the "high yielders" seems significant. But they really shine once the dividends have been added. These delightful dividend providers had average total returns of 10.3% vs. only 1.4% for the S&P 500 Index, an "outperformance" of 8.9% for the 366 day (or 367 day, for leap years) asset hold duration.

While there is no guarantee of such superior relative returns into the future, it appears at least likely that, everything else being equal, high dividend, low debt securities will continue to do better than the major market averages. Just by way of illustration, over a 30-year investing career, an 8.9% advantage, given an initial $10,000 investment, could turn into about $119,000 in excess profits (assuming similar future returns in tax-advantaged accounts, with reinvestment of all dividends and capital gains).

Here are a couple new picks that have above average dividends and low debt. They looked like bargains as of 11/9/05, when their data was found at Yahoo Finance:

YieldP/EDebt to
Ark Restaurants Corp.ARKR$28.604.92%13.150.00%
Furniture Brand Int'l.FBN$18.063.37%14.330.32%

(My thanks to Evelyn for providing an investment-related article that inspired the cited statistical review and an emphasis on the purchase of dividend paying stocks.)


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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