Dividends are in demand, according to the Wall Street Journal Online.
After fewer investors sought dividend-yielding funds in the 1990s, content enough to watch their share prices surge, a bear market and new tax laws have refocused investors' attention.
"Investors want it; institutions want it, and companies are starting to react," said Howard Silverblatt, senior index analyst at Standard & Poor's in New York. The number of companies that issued dividends dropped from 469 in 1980 to 351 by 2002, or 25%, but since 2002, that trend has reversed. Now, 387 companies issue dividends, an increase of about 10.3%.
"Investors are looking for total return and a more conservative approach," said Silverblatt. "Dividend stocks have a lot lower risk. The dividend acts like an anchor. In good times, the stock doesn't go up as much, but in bad times, it doesn't go down as much."
Mutual funds, many of which already seek high dividends for investors, have responded, too. Several new "rising dividend" funds have emerged, which focus on companies that can increase dividends regularly without cutting into earnings.
"Companies that can consistently and substantially increase their dividends year after year have good solid business plans and solid growth rates," said Don Taylor, co-manager of the San Mateo, Caif.-based Franklin Rising Dividends Fund.
Dividends reinvested can be a powerful tool for investors. For example, the S&P 500 has delivered a 10.4% annualized return over the last 80 years. S&P says that about 40% of that growth is due to dividend reinvestment. That means that a $10,000 investment that did not earn dividends made in 1926 would have been worth $1.1 million at the end of Feb. 2006, but the same investment with the dividends consistently reinvested would today be worth $26.3 million.
Dividend payout also tells a lot about a company.
"We'd rather have a lower-yielding stock growing its dividend aggressively than a higher-yielding stock that isn't growing the dividend," said Richard Helm, manager of the Cohen & Steers Dividend Value Fund, based in New York.
"You can't just chase yield," argued Jill Evans, co-manager of the Milwaukee, Wisc.-based Alpine Dynamic Dividend Fund. "Sometimes the fattest yield can indicate a problem, she said. Take, for example, General Motors, which delivered 4.8% dividend yield, but whose fundamentals are faltering.
A 4% dividend yield is attractive, said Evans, but "if the valuation is stretched or the fundamentals are changing, you can easily lose 4% on the stock."
Dividend portfolios vary vastly, aid Dan Culloton, a fund analyst wit Chicago-based Morningstar. ETFs including iShares and Powershares, in Wheaton, Ill., consider yield over valuation or business plans, and have little performance history to refer to.
Funds such as T. Rowe Price Dividend Growth, based in Baltimore, Md., Boston-based Fidelity Dividend Growth, and Valley Forge, Pa.-based Vanguard Dividend Growth can each buy stocks that do not now, but may in the future, issue dividends.
"Just because a fund has 'dividend growth' or 'rising dividends' in the name doesn't mean it's strictly following a strategy of buying stocks that have increased their dividend," Culloton said.
Franklin's Rising Dividends fund has a "strong and consistent" track record, according to Culloton. Culloton attributes the success to the standards Franklin holds companies to, including a doubling of dividends within a decade, increased for eight of 10 years without cuts, low debt and never paying more than 65% of earnings.
While Franklin's fund tends to hold large-cap stocks, Cohen & Steers' fund invests 40% in small-caps, including internationals, according to Evans.
"A lot of the big-cap stocks aren't very exciting right now," said Evans. "There are small-cap opportunities in the dividend-paying world. You just have to do your homework."
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.