In the 0% interest-rate world of Ben Bernanke, the 3% dividend yield is king.

When a 2-year Treasury note yields 0.22% and a two-year CD pays 0.85%, it’s not surprising that savers and investors are eager to snap up anything with a higher yield.

That’s got an upside—stocks that pay 3% or more have shown big gains in price as dividend-hungry investors have bought the shares. Intel (INTC), for example, which paid a 3% dividend at the end of 2010, returned 19.03% in 2011 (in price appreciation and dividends.)

And it’s got a downside—as investors pile into a stock yielding 3% or more, the dividend yield goes down as the price goes up—even if the company increases its dividend payout. Intel paid out 78 cents a share in dividends in 2011 versus 63 cents in 2010, but thanks to the climb in the stock’s price, the yield now—on February 1, 2012–of 2.94% is less than the 3% yield in December 2010.

Companies recognize this hunger and, as I wrote in my November 25 post http://jubakpicks.com/2011/11/25/companies-re-emphasize-dividends-and-it-couldnt-come-at-a-better-time/ , they’re aggressively raising their dividends because they realize that in the current low-yield world it’s an extremely effective way to support their stock price. Investors right now would rather get a higher dividend than a share buyback. This has led companies to shockingly hefty dividend increases. One recent example is Mattel (MAT), which lifted its dividend by 35% on January 31. A full year’s pay out at the new rate works out to a yield of 4% on the January 31 closing price even after the shares jumped 5% in price on the news.

I don’t think the trend pushing up the price of stocks yielding 3% or more is about to come to a quick end. At its January 25 meeting the Federal Reserve’s Open Market Committee said it would keep short-term interest rates at their current exceptionally low level—I guess 0% counts as exceptionally low—until the end of 2014. That’s a big extension of the Fed’s previous guidance for interest rates at this level until mid 2013.

Which sets savers and investors an interesting problem. We all want higher yields and we certainly don’t mind cashing in on any price appreciation. But the appreciation in share prices constantly pushes the yield down on these stocks. That’s not a problem for investors who already own shares. They’ve locked in their yield when they bought. But it is a problem for investors with new money as yesterday’s high dividend stock turns into tomorrow’s stock with a mediocre yield.

And settling for a declining yield because we locked in a good yield when we bought our shares a year or two or three ago strikes me as passing up one of the best things about the current dividend craze. Because many companies right now see a higher than 3% yield as the best way to support their share price in a sometimes difficult market, many companies are working hard at raising their dividend payout fast enough to keep pace with their rising share prices. The goal is to add enough to the dividend payout every year (or even every quarter) to keep that yield above 3% even if the share price is climbing. So, for example, Intel, which saw its yield slip below 3% as its share price climbed in the first half of 2011, upped its quarterly dividend to 21 cents from 18.12 cents with the August quarter.

Of course, not every company has the cash to do that—or a management that’s committed to increasing the dividend at that pace. But as a saver or investor in this financial environment, you’d sure like to have more of those stocks in your dividend income portfolio rather than less.

So that’s why I’m going to do a fine-tuning of my Dividend Income Portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ today. Read more

On Wednesday, January 25, the U.S. Federal Reserve said it would keep interest rates at their current exceptionally low level until the end of 2014. Forget about the middle of 2013, which seemed extremely far away when the Fed made that “guarantee” in August. And forget about the beginning or middle of 2014. Now the Fed is talking about the end of 2014.

Almost three years from now. Three years with short-term interest rates near 0%.

Let’s cut straight to the chase for investors: Who wins and who loses from this extraordinary statement of policy by the U.S. central bank? Read more

Update DuPont (DD)

You’re entitled to feel whiplashed by DuPont (DD) over the last week or so.

First, on December 9, DuPont announced that fourth quarter earnings would come in at 28 cents to 36 cents a share, well below the Wall Street consensus of 46 cents a share. The problem, the company said, is that customers are cutting back on orders on fears of a global economic slowdown, preferring to draw down inventories rather than risk getting caught with raw materials they don’t need. The problem has been spread across DuPont’s businesses in plastics, autos, general packaging, home building, and electronics. Europe, no surprise, is the weakest region.

Second, on December 13 at the company’s investor day, DuPont said, in effect, that Wall Street had overreacted by cutting projections for full-year 2011 earnings to $4.23 after the negative pre-announcement. For 2011 the company projected earnings of $4.20 to $4.40 a share. Cost cutting and synergies from the acquisition of Danisco–$300 million and $130 million, respectively—are materializing sooner than expected. Although the businesses the company mentioned in the December 9 preannouncement are indeed slowing, growth is more than holding up at the fast-growth industrial biosciences and nutrition and health segments. DuPont said it expected long-term annual earnings growth of 12% (at the high end of company guidance of 10% to 13% annual growth) on long-term sales growth of 8% to 10% in agriculture, 10% to 12% in industrial biosciences, and 7% to 9% in nutrition and health.

What is DuPont really telling investors? Read more

Gold mining stocks add dividends as a way to compete with bullion ETFs

Gold mining companies are getting the dividend religion too.

They’re adding dividend payouts in an effort to close the “attractiveness gap” with gold bullion ETFs.

Back on November 25 I wrote about the general resurgence of dividends http://jubakpicks.com/2011/11/25/companies-re-emphasize-dividends-and-it-couldnt-come-at-a-better-time/ . Given the lack of any capital appreciation in the current market and an increasing cynicism among investors about stock buybacks, companies have started to increase dividend yields as a way to support share prices and keep on the good side of capital markets.

Gold mining companies have an added incentive. The rising popularity of gold bullion ETFs (Exchange Traded Funds) has come at the expense of gold mining shares. Investors who want to create a hedge on inflation or currency depreciation can use ETFs as their vehicle instead of buying shares of gold mining companies. The demand for gold ETFs has cut into the demand for gold mining shares so much that gold mining stocks have lagged increases in the price of gold. So, for example, while gold is 46% higher than it was in December 2009 (as of the close on December 13), shares of American Barrick (ABX) are just 26% higher.

But neither physical gold nor gold bullion ETFs pay a dividend and this seems to be how gold mining companies—some of them anyway—have decided that they can compete. Goldcorp (GG), for instance has increased its monthly payout to 3.4 cents a share from 3 cents in November 2010 from 1.5 cents a share in 2009. IAMgold (IAG) raised its dividend on December 9 to an annual 25 cents a share from last year’s 6 cents a share payout.

The most ambitious effort comes from Newmont Mining (NEM), which has pledged to link its dividend payout to the price of gold. Read more

Dividends are back in style.

Of course, for some companies they never stopped being a key way to return profits to shareholders. For example, when food distributor Sysco (SYY) raised its dividend this quarter by 3.8%, it marked the company’s tenth consecutive annual dividend increase. The 9% increase in its annual dividend declared on November 21 by Lancaster Colony (LANC), a manufacturer of candles and specialty foods, beat even that record of consistency. Lancaster Colony is one of only 16 U.S. companies to have increased cash dividends every year for 49 years or more.

But I’m talking about something very different than those examples of dividend consistency. This quarter I’m seeing companies that have been relative dividend tightwads decide not only to up their payments but to up them big time. I’m seeing 12%, 15%, and even 50% and 67% dividend increases. I’ve even seen one company raise its regular annual dividend payout twice this year.

For these companies this isn’t business as usual—and it signals something new in the way that these companies have decided to support their share prices in a very rough stock market. The good news for investors, of course, is that these dividend increases are coming at a time when lasting price appreciation has become extremely hard to come by.

What’s going on? Read more