NASDAQ Dividend Achievers: Proven Performance

Dividends help identify well-managed companies; every dividend declaration represents a promise by management and a vote of confidence by the board of directors in the company's leadership.

Companies that consistently raise their dividend payouts also raise the bar on their own performance expectations.

Shares of dividend-paying companies possess built-in value that makes them generally more resilient in down markets, with solid appreciation potential during earnings-driven market upturns with less price volatility.

Dividends are also a key source of returns historically. In a 2012 paper, "Why Dividends Matter," Dr. Ian Mortimer and Matthew Page of Guinness Atkinson Funds studied dividends' contribution to stocks' total returns. This contribution averaged 52.7% for the decades since the 1940s, with much higher levels — 75%-plus — in the 1940s and 1970s.

The authors note: "What we find more compelling, however, is that the importance of dividends to total returns increases dramatically in low-growth decades — which are defined by some combination of sluggish economic growth, rising inflation, increasing oil prices, and high unemployment. In low growth periods such as the 1940s and 1970s, dividends accounted for over 75% of total returns."

The two exports also report that dividends' importance to total return grows with the investor's holding period. For investors with longer-term perspectives, dividends have been the key driver in returns.

"For an average holding period of one year, dividends accounted for 27% of total returns for the S&P 500 since 1940," Mortimer and Page explain. "If we increase the holding period to three years, dividends account for 38%; [for] five years it increases to 42%; over a 10-year period, it rises to 48%; and with a 20-year holding period, dividends account for some 60% of total returns."

Dividends & Markets

Mortimer and Page also see dividends as providing market signals from a company's management team: "The market sees a long history of dividend payments as establishing a company's credentials and the management team, making significant cuts by company management more unlikely. That is, dividends are a reflection of the long-term earnings power of a company and are therefore set at a level that is sustainable."

This belief is shared among leaders of several firms that qualify for Dividend Achiever status. Robert J. Sprowls, president and chief executive officer of American States Water Company in San Dimas, Calif., notes, "Maintaining and growing the dividend signals to shareholders the confidence our management team and board of directors have in the future of the company. Both actions also allow us to share the success of the company with our investors."

Sprowls adds, "Creating shareholder value is a key driving force behind the business decisions we make. As the company's earnings have grown, we have continued to grow our dividend. In May 2013, we announced a 14.1% increase in our third-quarter dividend. This is on top of the 26.8% dividend increase in the third quarter of 2012. We are proud of the fact that the company has been able to increase its annual dividend for 59 consecutive years. Our inclusion on the Dividend Achievers list validates our position as one of the strongest dividend paying companies and an attractive investment."

Benefits for Investors

Frank C. Sullivan, chairman and chief executive officer of RPM International in Medina, Ohio, another Dividend Achiever, emphasizes the value that the firm's dividend policy has for investors. "We view the cash dividend as an important part of total return to our shareholders, which has outpaced the Standard & Poor's 500 by 87% over the past 10 years and by 27% over the past five years," he says.  "We also view it as a prominent indicator of our strong cash flow position.

"Lastly, a commitment to an annually growing dividend instills a cash-focused discipline that helps drive consistent performance," explains Sullivan. "Our last increase of 4.7% on October 4, 2012, which increased the quarterly dividend to $0.225 per share, represented RPM's 39^th consecutive year of increases in the cash dividend. Less than 50 companies out of 19,000 publicly traded businesses have increased their cash dividend for this period of time or longer, and we are proud to be among this elite group."

Tony Ivins, corporate treasurer of Questar Corporation in Salt Lake City, Utah, expresses similar views on behalf of the company, which is a Dividend Achiever. "Questar's dividend is an important source of return for investors," he says.

"Since our restructuring in 2010, Questar's board of directors has increased the annual dividend by almost 40% and continues to target a 60% dividend-payout ratio," Ivins explains. "With our earnings growth outlook, we expect our dividend will continue to grow, building on our history of increasing our dividend 41 times over the past 41 years."

New Investment Options

The hallmark of these Dividend Achiever companies and their peers is consistency. Their management teams recognize the value of dividends to shareholders and as a signal to the market.

Foreign investors also value U.S. Dividend Achiever companies, and NASDAQ is working to expand the index line to attract those investors, says Jacobs. The first products to target this market are aimed at Canadian investors.

"Right now, if you're a Canadian investor and you want to buy the U.S. Dividend Achievers, that's fine. Go ahead and buy it," he shares. "However, you're at risk now for the Canadian dollar versus U.S. dollar, if you sell in your own account in Canada. So, we created index versions that have a built-in Canadian hedge for the Canadian dollar. The portfolio is 100% hedged, and that makes it much more palatable for a Canadian. And, we can do that obviously in other countries too."