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Dividend stocks are the Matt Ryans of the stock market. Like the Atlanta Falcons quarterback, dividend stocks are traditionally solid, if unspectacular, investments. Most of them are reliable performers that can be counted on year after year, but in the end they have a limited ceiling with very little room to grow. Dividend stocks aren't usually the champions of the stock market.
But 2011 was different. In a year of global economic uncertainty, dividend stocks behaved more like Tom Brady or Aaron Rodgers; they were the best-performing stocks on the market. Overall the S&P 500 was flat for the year, but stocks listed on the index that paid dividends produced an average return of 1.5%. S&P 500 stocks that didn't pay dividends, meanwhile, were down 7.5% for the year.
That was a complete role reversal from the previous year. In 2010 stocks were up 13%, and it was small caps – most of which don't pay dividends – that led the charge. Small-cap stocks historically outperform larger dividend stocks when the economy is flourishing. They simply have more room to grow.
But the economic recovery stalled in 2011, and only well-established companies sitting on boatloads of cash managed to make hay in the stock market. Companies with lots of cash are typically dividend-payers, with enough profits to kick some of it back to their investors in the form of quarterly payouts.
Not surprisingly, the biggest and most well-established stocks were the best performers in 2011. According to market research firm Birinyi Associates, the top 100 stocks in the S&P 500 by dividend yield were up an average of 3.7% before factoring in their dividend payouts.
Among dividend payers, utilities, real estate, health care and telecommunications were the most profitable sectors.
Utilities lived up to their reputation as stocks that are impervious to market volatility, producing average returns of 9.7% with an average dividend yield of 4.1%. Real estate stocks were next with 6.9% returns. These stocks are always among the top dividend payers since real-estate companies are required to distribute at least 90% of their taxable income to shareholders.
Health care stocks were up 6.6% for the year, with an average dividend yield of 3.7%. Telecommunications stocks had the highest yield rate of all S&P stocks by the end of 2011, at 5.9%.
With Europe's sovereign debt crisis still festering and U.S. unemployment stubbornly hovering above 8%, uncertainty in the market remains. While there have been signs of progress, 2012 should be another big year for dividend stocks. Standard & Poor's recently projected that dividend stocks will pay shareholders a record $252 billion in 2012.
Last year S&P 500 stocks paid $240.6 billion in dividends, up from $205 billion in 2010. It was the largest payout since 2008, before companies felt the full impact of the recession. This increase shows that companies are again feeling comfortable enough with the state of the economy to share some of their profits with shareholders. According to The New York Times, only 101 U.S. companies decreased or suspended their dividends in 2011 – the fewest number since 2006.
With dividend-paying stocks outperforming non-payers so dramatically last year, other stocks may soon jump into the dividend pool. As one portfolio manager told the Times, "The idea is beginning to percolate a little bit in management suites that paying a bit higher percentage of your earnings in dividends might be a way to a higher stock price."
In other words, dividend stocks may again be more Tom Brady than Matt Ryan in 2012.