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By Ben Baden
Some Wall Street banks are expected to begin increasing their dividends in the third quarter
Dividend-paying stocks make up the core of many income-focused investors' stock portfolios. Typically, companies that pay dividends do so to inspire confidence in investors and demonstrate that they have a sustainable business with strong cash flows. What better way to woo investors than by cutting them a periodic check for investing in the stock of their company? For investors, dividends help cushion the blow of steep market downturns, and add to their total return during good times. Today, dividend yields of U.S. stocks are low compared with historical standards, but experts say there are reasons to be optimistic.
"Bottom line: Dividends are doing great," says Howard Silverblatt, senior index analyst at Standard & Poor's. But his enthusiasm comes with a caveat: "as long as you don't go back too far," he says.
So far this year through the end of February, 84 companies in the S&P 500 stock index have increased their dividends, and none have decreased them, according to S&P.
That's because many companies -- most notably big banks like JPMorgan and
Recent dividend cuts by big banks means investors must look elsewhere for dividends.
In 2007, financial services companies accounted for 29 percent of the S&P 500's overall dividend payout. As of the end of February, the sector made up only 9 percent of total payouts. Other areas of the market that offer dividends include consumer staples stocks, which make up the largest percentage of total payouts (17 percent), healthcare companies, (13 percent) and industrial companies (12 percent).
While banks' payouts have fallen, dividends have picked up within the technology sector.
"Tech is a big payer in dividends now," Silverblatt says. Historically, tech companies have focused on generating a higher stock price and growing their business, not paying dividends.
Yield-hungry investors can use mutual funds to invest in a diversified mix of dividend-paying companies. These dividend-focused funds come in two major forms. Some look for dividend growth instead of high current yields, and seek companies that steadily increase their dividends over time. For example, Richard Helm, manager of the Cohen & Steers Dividend Value (symbol DVFAX), looks for stocks with a history of stable and growing dividends. "Historically, the highest-yielding names in the market generally are such because there's issues with the companies," Helm says. Often, companies facing financial trouble have to lower their dividend over time because it's not sustainable, he says.
Helm, like many dividend-focused managers, is heavily invested in the financial services sector. He says he's waiting for the Fed to give some banks the go-ahead to raise their dividends, many of which are only pennies per share at the moment. "We do expect that we're going to see some pretty significant increases out of a handful of banks this year -- and more next year," he says. Specifically, he sees
But with the S&P 500 yielding only about 1.8 percent currently, other managers say investors must turn to sectors with higher-yielding stocks. "You want to have a combination of high-growth and high-yield [dividend-paying stocks]," says Daniel Peris, manager of
Federated Strategic Value Dividend (SVAAX), which currently yields about 5 percent. (Cohen & Steers Dividend Value yields close to the S&P 500 average.) Peris currently favors consumer goods companies, as well as traditionally high-yielding, lower-growth sectors like telecommunications and utilities. Two of the fund's largest holding are
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