The Dark Side of the Dividend Boom

But that rule is only true because of the historical dividend yield of 3.92% -- and the way dividend yields rise when stock prices decline. Take away the average dividend, and suddenly, long-term investors in the 15-year periods that began in 1927, 1928, 1929 and 1930 lost money. And the 15-year period that began in 1960 comes close to showing a loss.

Looking at 10-year returns, investors don't have to go back to the Great Depression to see that without the historical average dividend yield of 3.92%, it is possible to lose money with a 10-year holding period. It happened in 1965-1974, in 1966-1975 and in 1969-1978. That's not ancient history.

Shift Toward Big Names

Want a decent dividend these days? Pretty much forget about finding one among the common stocks of any sector besides utilities. And the pickings aren't that great among utility stocks anymore, either. Because utility stocks have run-up so much -- the Dow Jones Utilities Index is up nearly 22% so far in 2005 after climbing 25.4% in 2004 and 24% in 2003 -- the dividend yield on the index had fallen to 3.15% as of Dec. 16. As large companies raise their dividends to something closer to the historical average, the gap with utility yields will close, and large-company stocks will become more attractive.

History suggests that large-company stocks rather than small-company stocks will benefit most from this dividend effect. I say "suggests" because it is difficult to construct a small-company index that accurately represents the characteristics of what most investors think of as small-cap stocks. But the data from the Russell indices are a decent indicator of the difference in yield between big- and small-company stocks.

The large-cap Russell 1000 Value Index shows a yield of 2.5% right now; the small-cap Russell 2000 Value Index shows a yield of 1.7%. And large companies are more likely to have free cash flow that they can use to more quickly raise future dividends than small companies, which are often in the capital-consuming early stages of their growth.