IN some investors’ opinion, there’s nothing more instantly gratifying than receiving their dividend cheques in the mail each quarter. Others overlook the importance of dividends altogether and think of a stock’s value solely in terms of its price appreciation. In reality, however, dividends are a key component of total return, that is, a stock’s annual appreciation (or loss) plus normal and extraordinary dividend. Given the continued and expected low interest rate environment (with the 90-day Treasury Bill yield at 9.97 per cent) there has been an uptick in the local stock market. Investors should consider taking a second look at dividend-paying stocks, which provide the added incentive of a reliable source of income.

With dividends, investors receive a portion of the company’s profits now, rather than when they sell (if a capital gain is made). These payments are typically made by well-established, mature firms which are no longer in an expansionary phase, and which have been able to manage their cash flows effectively. Further, while stock prices are largely a signal of how much investors think a company is worth at any given moment, dividends are based on the firm’s actual operations and available cash. Historically, high dividend yield companies typically have lower volatility in their stock prices as compared to a benchmark index or comparative sector companies.

A company’s dividend-paying capability and its ability to increase its dividends over time can also speak volumes about its financial health. Diversified financial services provider, Scotia Group Jamaica Ltd (SGJ) not only has a long-standing history of stable payouts, but has also been steadily boosting its dividend payments year-over-year. Last year, the group paid out $4.33 billion in dividends, an increase of almost seven per cent over that paid in 2008 and registers the second-highest payout on the Jamaica Stock Exchange (JSE). In fact, SGJ’s dividend payouts have been increasing every year since at least 2005, at an average rate of 10 per cent, in keeping with the Group’s policy to boost dividends “in line with the trend in earnings”. Certainly investors are eagerly anticipating the outcome of SGJ’s May 27 board meeting, at which directors will consider a second interim dividend payment for 2010.

Another top dividend-paying stock has been GraceKennedy Ltd (GK), which announced a new favourable dividend policy on May 14, 2010. The conglomerate, whose products are a permanent fixture on the shelves of most of the Jamaican and Caribbean Diaspora, will increase the frequency of dividend payments from two times to three times per year. To put icing on the cake, GK will also increase dividend payments to a minimum of 15 per cent of

Net Profit Attributable to Stockholders, up from a minimum of 10 per cent. At its investor briefing hosted on May 17, 2010, the company’s Chief Financial Officer (CFO) Fay McIntosh said the Group took this decision to reward shareholders who have stuck with the company over the years. She emphasised that despite lower earnings for its most recent quarter, GK continues to turn out respectable profits. As the company becomes more efficient with its new distribution centre in Spanish Town and continues to introduce new products, it is expected that it will continue to produce solid results. The company is paying out $0.50 per share on May 27, 2010 to shareholders on record as at May 3, 2010. GK advised that upcoming payments will be in September and December.

No discussion of dividends would be complete without taking a look at Carreras Ltd (CAR) that currently boasts the highest dividend yield on the local market of 13.46 per cent. This compares favourably with the 8.44 per cent after-tax return on the Government of Jamaica (GOJ) Jamaica Debt Exchange (JDX) bond which expires in February 2012. Though the cigarette distributor and marketer has been grappling with hefty increases in excise taxes or special consumption tax (SCT), not to mention the presence of illicit trade in cigarettes, it has maintained its strong dividend payout over the past few years. The firm has traditionally been able to make large payouts to its shareholders as its overheads are low; its main expenses are marketing and distribution costs.

Furthermore, the company is also revered for making “special” or extra-ordinary payments whenever it receives any extraordinary gains. For example, in 2008, the company declared a special cash distribution of $8.30 per share, representing the amount net of transfer tax, to be paid out of proceeds received from the liquidation of a subsidiary. Last year, CAR paid out one of the highest amounts on the Exchange of $4.37 billion. It has paid out $2.00 per share so far this year and it is widely anticipated that the company will pay out a special dividend when it eventually recovers $1.73 billion in taxes from the Government of Jamaica (GOJ).

Since the start of the year, strong dividend-paying stocks like SGJ, GK, CAR, Pan-Jamaican Investment Trust Ltd (PJAM) and First Jamaica Investments Ltd (FJI) and others have been outperforming non-payers. These dividend stocks have produced an average year-to-date return of 23.26 per cent, exceeding the JSE Main Index’s 4.88 per cent gain over the same period. Non-dividend payers like Pulse Investments Ltd (PULS) and Montego Bay Ice Ltd (MBICE) on average have returned -0.55 per cent.

This is not to say that investors should go out and put all their funds in dividend stocks when investing in equities — just because a firm isn’t currently dividend paying, doesn’t mean it should be overlooked. In general, younger companies do not pay dividends as they are reinvesting their profits to grow the business. Furthermore, as a company undergoes structural changes, it will likely forgo dividend payments until it gets back on its feet. A great example is Jamaica Producers Group Ltd (JP) which made the prudent decision to suspend its payments in 2009 as it looked to realign its business. The company behind St Mary’s banana chips reinstated its dividend this year, making a payment of $0.15 per share in January. Apart from JP, Salada Foods Jamaica Ltd (SALF) gave its shareholders cause for celebration last year when it reinstated its dividend payments after a two-decade drought.

With the Directors of companies like SGJ and CAR meeting in the upcoming days and weeks to consider dividends, we can expect that payments will be declared. Investors should use this time to consider adding dividend-paying stocks to their portfolios, keeping in mind that they should get in prior to the X-dates in order to maximise returns, especially given the current interim pullback in these selected equity prices.

Kimberly Thelwell is the Senior Investment Analyst at Stocks & Securities Ltd. You can contact her at kthelwell@sslinvest.com.