DIVIDENDS-----A BRIDGE TO THE FUTURE

When selecting companies, two key measures we use are the debt level, and the consistency of dividend increases on an annual basis. Having a manageable debt level greatly increases a company’s ability to raise dividends. Historically, these companies have provided superior results for investors. Over the past 200 years, stocks have averaged an annualized total return of 7.9%. Nearly 75% of this return is due to dividends and dividend growth.

Regardless of client's investment goals, income and growth are the main components of a successful portfolio. Dividends need to generate enough income for the client during the retirement years in order to preserve the principal investment.

"For the vast majority of stocks, the dividend record and prospects have always been the most important factor controlling investment quality and value.”

Security Analysis, Benjamin Graham, David L. Dodd, Sydney Cottle

Dividends are an essential component of preserving buying power relative to inflation. This is particularly true if we assume the Consumer Price Index (CPI) understates the real rate of inflation, which we believe to be around 7%. With that said, companies that increase their dividends each year by more than 7% are generating income for shareholders that is “keeping pace with (or ahead of) inflation”.

We recently compared our 25 largest holdings to the S&P 500 to determine if we are staying true to our stated discipline of investing in companies that offer and grow their dividends at a rate that outpaces inflation.

In short, we believe dividend growth is one powerful way that investors can outperform the S&P 500, and meet their income needs.

The results are weighted based on the actual percentage holdings of each company in the LBA 25

Percent of companies that paid a dividend in 2005.
LBA 25: 76%
S&P 500: 77%
Percent of companies that increased their dividend in 2005.
LBA 25: 68%
S&P 500: 57%
Average dividend increase over the past five years.
LBA 25: 24.5%
S&P 500: 6.6%