Investing for the Dividends Makes More Sense Than Ever

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

– John D. Rockefeller

While I like to think my life is not as narrowly focused as Rockefeller’s, today’s low-interest environment has encouraged my interest in dividend-paying stocks.

Specifically, I look for stocks in companies that pay close to a 3 percent dividend and whose management has shown the desire and ability to increase dividends. It’s a strategy that allows me to pay much less attention to Wall Street forecasts and the day-to-day ups and downs in the economy and the market.

I’m not the only one who pursues this investment strategy, of course.

As Josh Peter, director of equity strategy for the Morningstar Dividend Investor, wrote in the January MDI monthly letter, “I’ve long avoided the common Wall Street practice of making economic or stock market projections for the coming year. I don’t think anyone has a realistic chance of being consistently correct with such projections over such a time period.”

Another reason not to focus on forecasts is that the effects of guessing wrong survive long after the mistake. For instance, investors are afraid to make investment commitments when the market has risen significantly after their initial bearish bet.

I try to estimate the year-end dividend rates for all of my portfolio holdings. I also use the option to automatically reinvest my dividends. This avoids paying commissions on new stock purchases.

During the course of the year, assuming my proposed new equity has positive outlook, I will try to enhance my portfolio income by purchasing companies that payout higher dividends. To raise the cash, I will sell some of my lower-yielding stocks.

I do not focus on the short-term fluctuations of my portfolio holdings, because I feel that the market ups and downs are beyond my control.

In 2012, I was fortunate that almost all of my dividend-paying stocks increased their payouts. Examples are Wells Fargo (WFC), BlackRock (BLK), General Mills (GIS), General Electric (GE), and Microsoft (MSFT). I added to my Apple (AAPL) position when that company began paying a dividend.

GE remains an interesting story. Jeff Immelt, the current CEO, said he hopes GE can ultimately raise its dividend back to 31 cents. The company cut it to 10 cents in 2008, a shocking move during that terrible year for the market and economy. Currently, GE pays 19 cents.

Several of my financial holdings, including WFC, JPMorgan Chase & Co. (JPM) and Metropolitan Life Insurance (MET), say they will increase their dividends if they receive approval from the regulators. The latter recently sold its bank holding in order to get a favorable ruling from the Federal Reserve.

Peter, in his letter, was very bullish on the ability of WFC and U.S. Bancorp (USB) to increase their dividends. The former could add 18.2 percent and the latter 12.8 percent if regulators allow them to increase their payout ratios up to 35 percent, he said.

Peter also said Kinder Morgan Inc. (KMI) could add 11.1 percent, Phillip Morris International, 10.6 percent, and United Parcel Service, 8 percent.

Despite the recent tax increase on dividends to 23.8 percent for the top bracket, I maintain my bias toward equities. It just makes sense for investors to focus on the ability and willingness of management to increase dividends.

An increase in the portfolio’s market value would be an additional sweetener.

Instead of agonizing over market value, take pride in your investment acumen if the stocks in your portfolio have increased their dividends in the high-single-digit range.

Just imagine what fun Rockefeller would be having.