How Dividends Lifted the Dow in 2013

The Dow Jones Industrials climbed 26.5% in 2013, impressing investors with the average's best gains in 18 years. Yet many of those investors ignore the fact that the Dow's raw results don't include the dividends that its 30 components pay. Moreover, even though dividends only added about 3 percentage points to the Dow's overall total return, the big boosts in payouts among index components last year definitely gave investors more confidence about the long-term prospects for their respective businesses. Home Depot , UnitedHealth , and JPMorgan Chase were the three Dow members that raised their dividends the most during 2013, lending their support to the overall positive sentiment that sent the blue-chip average soaring.

Home Depot's 34% dividend increase came early in the year, with its dividend rising from $0.29 per share to $0.39. Yet like many other companies recently, the home-improvement retailer also used stock buybacks to return capital to shareholders, authorizing a whopping $17 billion repurchase program through the 2015 fiscal year. That represents almost 15% of the company's overall market cap, and with housing continuing to show signs of strength, it's not surprising that Home Depot stock kept hitting new record highs with gains of 36% in 2013.

Much like Home Depot, UnitedHealth combined a big dividend increase with a new authorization for stock buybacks. The health insurance giant raised its dividend 32% back in June, taking the quarterly payout from $0.2125 per share to $0.28. With the repurchase program covering 110 million shares, UnitedHealth could end up buying back more than 10% of its outstanding stock if it executes on the initiative in full. Implementation of the Affordable Care Act has created many hurdles for UnitedHealth, but its initiatives to bolster growth through international expansion and its OptumRx pharmacy benefits management system helped send the stock up 41% last year.

JPMorgan Chase rose 37% in 2013. Its dividend increase of 27% came in May, after the bank got approval for its capital strategy from the Federal Reserve. The Fed did require JPMorgan to resubmit capital plans to address some weaknesses in the original proposal, but it didn't stop the bank from raising its quarterly dividend from $0.30 per share to $0.38. That restored the bank's pre-crisis dividend payout level, and with requests for a $6 billion buyback through the first quarter of 2014, JPMorgan has treated shareholders well recently.

It's important not to underestimate the importance of dividends and buybacks in contributing to the positive sentiment in the stock market recently. Anything that reverses the trend toward ever-higher payouts could mark a turning point for the Dow in its bull-market run.

Another reason why dividend stocks are so important
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

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Fool contributor Dan Caplinger owns warrants on JPMorgan Chase. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Home Depot and UnitedHealth Group. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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