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Investor: Do rising dividends, earnings go hand in hand?
By HELEN HUNTLEY, Times Staff Writer
© St. Petersburg Times, published February 3, 2002
Q. I have noticed in the dividends and earnings reports that even in a recession, some companies increase their dividends 2 to 5 cents a share while the normal increase is 1 cent. Is there any statistical evidence that the companies that increase their payout more than the norm also see their company's share price increase in value above the norm? If so, it seems that would make them very good candidates for an individual's portfolio. Has anybody researched this phenomenon?
A. Companies that regularly increase their dividends are good candidates for your portfolio. However, you wouldn't want to rush out and buy a stock solely on the basis of a 3-cent increase.
"It's steady regularity that you want to look for," said Geraldine Weiss, editor of Investment Quality Trends, an investment newsletter published in LaJolla, Calif. "A company that year after year will raise its dividends is adding to the investment value of that holding."
Usually companies with a track record of rising dividends also have a track record of rising earnings. Put the two together and over the long run, you should have a rising share price.
Weiss said many investors who years ago bought stocks paying an annual dividend of 3 to 4 percent of their purchase price now enjoy annual dividend income equivalent to 20 percent of the original investment thanks to stock splits and dividend increases.
One thing to watch for is the percentage of the company's earnings the dividend represents. A company with a very high payout may not be able to sustain the dividend, let alone increase it.
During the spectacular runup in Nasdaq stocks, dividend-paying stocks were out of fashion. The theory was that it was smarter for companies to reinvest earnings in their businesses than to pay out cash to shareholders. Most of the hottest stocks paid no dividends at all. When Nasdaq crashed, investors developed a renewed appreciation for stodgy old stocks with real earnings and dividends. In a falling market, dividends create something of a floor underneath a stock's price.
When comparing dividend increases, remember to look beyond the pennies to the percentage increase those pennies represent. A 1-cent increase in a 10-cent dividend is more impressive than a 3-cent increase in a 50-cent dividend.
Q. Do people in Florida need a will? I know a husband and wife who own their home and car free and clear and have about $150,000 in bank accounts. I told them they need a will and they said a lawyer told them that if you don't have a will, your property will be given to your next of kin. Who is right? If they die with no will, does the state of Florida take it all?
A. Both you and your friends are partly right. If your friends have all their property in joint ownership, when one dies, the other gets the property. A will won't make any difference. But if some property is held in only one name and there is no will, the surviving spouse might have to divide the property with the children, if there are any.
Generally, where there is no joint owner or named beneficiary and there is no will or trust, the property will be distributed according to state law through the probate process. Spouses, children and grandchildren are first in line, followed by parents and siblings. You can read the complete list in Chapter 732 of the Florida Statues, which can be found online at www.leg.state.fl.us (click on "Laws," then "Estates and Trusts," then "intestate succession"). The state ends up with property if no heirs can be found.
A will or trust is essential if you want to leave property to charity, dear friends or favorite nephews or if you want to disinherit a child. I also highly recommend consulting with a lawyer if your estate is approaching $1-million or more.
What kind of investor are you? Should you have an individual retirement account? To help you answer these and other questions, BankSite Online offers a series of one-minute tests you can take online.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.