| 2006 is another strong year for dividends. For the third | | | | generous dividends and increased them in order to |
| year in a row, a growing number of companies have | | | | make their stocks appealing to investors.Our firm |
| either increased their dividends or begun paying | | | | continues to recommended equity income funds to |
| dividends. In addition, more investors are paying | | | | clients as core holdings in a diversified portfolio, as a |
| attention to the solid companies that are capable of | | | | part of their college savings plan or to produce reliable |
| paying dividends. That is a big change from the | | | | quarterly income in retirement. While these holdings |
| late-1990s, when investors by and large shunned yields | | | | have delivered above average returns for years, it is |
| and many companies refrained from paying them, so | | | | important to remember that it is not the objective of |
| that stock market yields in the U.S. plunged to | | | | the funds to beat a stock market index such as the |
| unprecedented lows. History shows, though, that over | | | | S&P 500. (The S&P 500 consists of 500 stocks |
| longer periods of time dividends have always been an | | | | representing major US industry sectors.)It is the |
| essential component of total return, regardless of | | | | objective of the funds to provide an attractive |
| which direction the market has headed. Between 1926 | | | | long-term return by pursuing a conservative strategy |
| and 2004, dividends accounted for roughly 40% of the | | | | focused on providing above-average current income |
| average annual return of the U.S. stock | | | | and growth of dividends over the years. Although the |
| market.Another impetus for the dividend resurgence, | | | | majority of assets have typically been held in U.S. |
| of course, has been the Jobs & Growth Tax Relief | | | | based companies, the funds have the flexibility to |
| Reconciliation Act of 2003, which lowered the | | | | invest anywhere in the world. In the past, the U.S. |
| maximum tax rate on long-term capital gains and | | | | stocks provided some of the most reliable dividend |
| qualified dividends to 15%. With a more level playing | | | | income in the world. Now, the U.S. is a relatively paltry |
| field between the taxation of capital gains and | | | | source of dividend income, and superior yields and |
| dividends, companies can more clearly decide what | | | | dividend growth come from companies based in |
| allocation of capital is best for shareholders over the | | | | Europe and Asia. Many of these equity income funds |
| long-term rather than what is more tax-efficient.There | | | | feature low expenses, experienced managers, limited |
| are relatively few individual securities that provide a | | | | volatility and steady long-term performance.(Review |
| high current yield and grow their dividends, so the | | | | the prospectus before investing. Past performance is |
| challenge for portfolio managers is to build a portfolio | | | | no indication of future results.)Source: Triump of the |
| of companies that, as a whole, meet both criteria. That | | | | Optimists, 101 Years of Global Investment Returns, |
| requires in-depth, company-by-company, and | | | | Dimson-Marsh-StauntonRafael O. Velez III is the |
| increasingly, global research. The search often begins | | | | Managing Director and Registered Principal of Summit |
| on familiar terrain. Electric utilities, oil and gas companies, | | | | Financial Advisors, LLC, based in San Mateo, California. |
| real estate investment trusts and banks are classic | | | | Additional resources and ideas are offered on their |
| examples of sectors that have traditionally paid | | | | Web site, . |