Prompted by a host of financial and economic developments, a growing number of investment advisers are steering their clients toward dividend-paying stocks.
"We are resolute in our belief that large, high-quality, dividend-paying companies, many of which are hiding in plain sight, offer a compelling investment option for growth and income," Mark Luschini, chief investment strategist at Janney Montgomery Scott, wrote in his latest memo to investors.
Luschini's view, echoed by other advisers at other firms, is that the growth stock rally that started in March of 2009 is getting kind of old. More staid dividend-paying companies may hold up better as the economic recovery continues at a somewhat anemic pace.
"The stocks and assets that have done the best are likely to perform less than the large cap dividend-payers over the next few years," Kate Warne, market strategist for St. Louis brokerage Edward Jones, told Reuters. "We think it's time for individual investors to reposition into less risky stocks."
There's another reason why investors are drawn to dividends: There are no other really attractive places to get income. "Income-seekers are being starved," Luschini said.
With one-year certificates of deposit paying less than 0.5 percent in interest and 10-year Treasury bonds yielding around 3 percent, it doesn't seem like such a risk to take a flyer on a solid company paying a comparable amount.
"Here's the way I look at it," Luschini said. "If I can do better than 3 percent and own a company that, 10 years from now, will be worth as much if not more than it is today, that seems like a pretty enviable combination. It could be better than the bond you hold for 10 years."
Finally, with the economy in slow-grow mode and interest rates very close to historic lows, there's the belief that dividend-paying stocks could actually be safer than long-term bonds. While investors who hold bonds to maturity can expect to get their initial investment back, bonds do lose value when interest rates rise. Investors who have to sell bonds (or who invest in bond-holding mutual funds and exchange-traded funds) could lose money when rates rise.
Of course, stocks provide no guarantees either. "I'm hearing from investors who are going to dividend stocks for yield," says Charles Rotblut of the American Association of Individual Investors. "But don't forget that they can fluctuate in price."
Here are some tips on how to use stocks for income without taking big risks.
• Don't chase big yields. Right now, you can find publicly traded companies offering double-digit dividends, but there's a reason for that — the company might have problems hanging over it that have depressed its price. Luschini tells clients the sweet spot for most safe dividend payers now is somewhere between 3 percent and 5 percent yields. He likes "household names" like Kimberly Clark, Exxon Mobil and Microsoft.
• Look for growing dividends. Buy companies that raise their dividend every year and "you'll get a raise," says Luschini. For example, Diebold has raised its dividend every year for 57 years, Johnson & Johnson has increased its payout for 47 years straight.
• Diversify sectors, or choose them carefully. Real estate investment trusts and utilities tend to pay higher than average dividends, but proceed with caution. "You might get a great yield but if there's something upsetting that happens in that sector, you could lose significantly," says Jeff Tjornehoj, a senior research analyst with Lipper, a Thomson Reuters company. Luschini's firm is recommending companies with moderate 3 percent to 4 percent yields in the consumer staples, healthcare, energy and technology sectors. Warne likes the tech sector for its reasonable prices and solid dividends, too.
• Consider broad portfolios. Dividend-focused mutual funds, ETFs and premixed portfolios can provide solid income and spread risks among many companies and sectors. The WisdomTree Dividend ex-Financials Fund, highly rated by Lipper, is currently yielding more than 4 percent and returned a total of 8.89 percent to investors in the first half of this year, according to data from the company and Lipper. Morningstar recommends the Vanguard Dividend Growth Fund, yielding 1.93 percent and up 7.55 percent year-to-date through July 20, according to Morningstar numbers. Online pre-built portfolio company FolioInvesting.com offers two portfolios for dividend investors. Its High Dividend Folio, a mix of the actual shares of 30 stocks from a variety of sectors, is currently yielding 4.73 percent, the company reports.
• Use them wisely. Retired investors often pile up on dividend stocks so they can cash payout checks quarterly and monthly. It's possible to choose companies with different payout dates and get dividend checks every month. But reinvesting dividends works, too. The S&P 500 has returned 3.34 percent a year to investors in the three years ending June 30, reports S&P. Without reinvested dividends? The increase would have been a much more trifling 1.05 percent annually.
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