Dividends are back, and their return couldn’t have come at a better time. Even if stocks fall apart (make that WHEN stocks fall apart, as they will at some point), those that pay dividends will, as a group, almost certainly hold up better than those that don’t. So investing in committed dividend payers is a timely strategy if you want to own stocks for their growth potential but worry about another punishing market decline.
Regardless of where stock indexes go, cash dividends are certain to rise this year and next. The 366 dividend-paying members of the Standard & Poor’s 500-stock index are expected to hand out $206 billion in cash in 2010, up 5 percent from 2009. Already, 72 S&P 500 companies have announced dividend increases this year.
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The reason for this largess is plain: Corporate America is flush with cash, and S&P 500 companies are sitting on $3.2 trillion of it. But executives are reluctant to make big capital expenditures, hire more people, or raise salaries and benefits substantially until they feel more confident about the economic recovery. And, like you, they’re earning next to nothing on their cash stashes.
So managements are under pressure to put their cash to work. Some are using it to buy companies or hard assets, such as energy reserves; others are using the green stuff to pay down debt and buy back shares (buybacks reduce the number of shares outstanding, boosting earnings per share and, theoretically, supporting a stock’s price). But, says Steve Schroll, manager of RiverSource Dividend Opportunity Fund, cash distributions are a sure thing, while stock buybacks are “subject to a great deal of skepticism.” In 2008 and 2009, dozens of companies suspended buybacks but continued to pay cash dividends.
Some analysts believe the financial crisis and the cataclysmic bear market may have permanently altered executives’ attitudes toward dividends. So they expect to see companies pay out a higher proportion of earnings in the future. As recently as 2006, the payout ratio (dividends divided by earnings) was 29 percent for S&P 500 companies; last year it was 37 percent, and Dan Peris, who runs Federated Strategic Value Fund, thinks the figure is heading toward 50 percent.
Identifying good dividend payers involves more than just screening for stocks with high yields (annual dividend rate divided by share price). One time-tested strategy is to look for companies with a history of regularly boosting dividends by at least 10 percent a year.
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