MONEY

Dividends offer insight into company executives' expectations

Dividend-paying stocks are not for every investor. Some believe that paying dividends to shareholders means that management has run out of good ideas for the company's cash. Others believe dividends aren't nearly as compelling as new and emerging technologies or spectacular earnings growth — these ho-hum payouts are neither hip nor alluring.

Frankly, dividends just leave some investors cold. A prominent portfolio manager once told my colleague that he simply "didn't believe in dividends." I never was sure what that meant. Dividends are a fact. They don't require faith.

Dividend-paying stocks are not for every investor.

In addition to contributing significantly to total stock returns over time, dividends provide insight into what management believes about the company's future. Let's first examine the total return component. In a 2003 editorial for the Financial Analysts Journal, investor and author Rob Arnott analyzed stock return data over a 200-year period and concluded that dividends and the growth of dividends accounted for 73 percent of the total return of stocks. Seventy-three percent! A number of other studies consistently reveal that dividend-paying stocks significantly outperform growth stocks over every time period measured. But dividends also tell us something about future earnings growth.

I could cite innumerable examples of large, industry-leading companies whose management's establish dividend policy based on expectations for future earnings growth. But the dividend statement provided by Lee Cole, CEO of small-cap company Calavo Growers (think avocados, among other things) is revelatory. Cole advocates that the stock's dividend expresses the underlying strength in Calavo's (stock ticker: CVGW) long-term earnings growth. And he is right: since 2002, Calavo's dividend has grown 275 percent and the stock has outperformed the S&P 500 three-fold.

I am not advocating purchase of the stock (though they distribute excellent avocados); rather, I am pointing out that vibrant, growing companies place value on returning profits to their shareholders via the dividend. And, that savvy management teams of big companies and small, set the dividend as a percentage of what they believe to be the long-term, sustainable earnings growth rate.

The dividend and its growth rate provide insight into management's future expectations and money in shareholder's pockets. A winning combination.

Recent market volatility can be attributed to any one of a number of catastrophic global events: Ebola, rising terrorism, an aggressive Russia or the sluggish economy in Europe. Pick one.

But there is another traditional source of market volatility: looming midterm elections. Wary investors should note that no matter which party is elected, stocks produce double-digit returns in the 12 months after the midterms.

According to S&P Capital IQ and reported in Barron's on Oct. 6, since 1946 through the 2010 midterms, the S&P 500 has risen an average of 17.5 percent over the subsequent 12 months. Worth noting in tumultuous times.

Nancy Tengler spent two decades as a professional investor. She is an author, financial-news commentator and university professor. Her book, "The Women's Guide to Successful Investing," is out now. Reach her at nancy.tengler@cox.net.