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The Truth About Dividends

By Stansberry Research Interview Series
Wednesday, December 20, 2006

I love dividends.
 
In these times of market uncertainty, even the traders among us should make moves to have some actual money coming into our accounts. A few long-term high-yield positions can go a long way to stabilizing a portfolio.
 
And if you think dividends are boring, think again.
 
Consider: Between 1802 and 2002, equities returned an average of 7.9% a year, according to Robert Arnott, PIMCO All Asset Strategy subadvisor. In other words, $100 invested in 1802 was worth $459 million in 2002. Now realize 5% of that 7.9% average annual return came from dividends.
 
You can make a ton of money off of income, particularly if you get in on the cheap.
 
Take Enterprise Products (EPD), for example...
 
We’ve covered Enterprise in these pages before. It’s one of the largest publicly traded energy partnerships in the U.S., with an enterprise value of more than $15 billion. It owns interests in the processing, refining, storage, and transportation of natural gas.
 
Currently, Enterprise trades around $29 and yields 6.2%. In 2006, the company paid out $1.80 in dividends. However, if you bought Enterprise back in the summer of 2004 when it was trading at $20, that $1.80 feels more like a 9% yield.
 
Buy Price
2006 Dividend
Yield
$20.00
$1.80
9%
$29.00
$1.80
6%

The same thing can be said for American Capital, another stock we’ve covered in these pages. American Capital is currently trading at $45 and change with a 7.8% yield. In 2006, American Capital paid out $3.33.
 
However, if you bought American Capital this summer at $34.00, that $3.33 is more like a 9% dividend.
 
Buy Price
2006 Dividend
Yield
$34.00
$1.80
9%
$45.00
$1.80
7%

Don’t think of dividends as fixed income. They’re not. Depending on your buy price and the rate at which the dividend grows, you’re buying for growth. And if you buy cheap and hold, that growth can be pretty stellar. Let’s take a look at Enterprise again, and I’ll show you what I mean.
 
Common sense tells you that if you bought Enterprise in the summer of 2004 and held until today, you should have made 15% in dividends (2.5 years at a 6% yield), right?
 
Only if you ignore Enterprise’s share price growth.
 
If you’d bought Enterprise in the summer of 2004, as we did in Inside Strategist, you’d have paid $20 per share. Enterprise’s share price has since risen to $29. And it’s raised its dividend, too. If you’d bought in the summer of 2004, you’d have since collected $4.22 per share in dividends.
 
So you would have made 41% in capital gains and 20% in dividends.
 
And since your buy price is $20, Enterprise’s current yield of 6% is more like a yield of 9%.
 
Still think dividends are boring?
 
Good trading,
 
Graham




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%