Dividend-paying stocks coming
back into vogue
Experts: Beware of high
yields, seek strong earnings
Debbie Carlson, Special to Tribune Newspapers
January 25, 2013
interest rates unlikely to rise from their rock-bottom
levels any time soon, some people are looking for higher-yielding
investments, and many are turning to dividend-paying
types of stocks were out of favor for many years in
lieu of growth-oriented shares, but in a more risk-averse
investing climate, the old-fashioned idea that companies
pay shareholders a small income has returned.
seeing (the idea of) returning value to shareholders
being reborn," said Damon Southward, chief market
strategist at Briefing.com.
A dividend is a claim on a portion of the company's
profits. Historically, publicly traded companies that
paid a shareholder dividend were usually old-line companies
like consumer staples or utilities that had consistent,
if not glamorous, performance. With interest-bearing
accounts like money market funds and some short-term
certificates of deposit earning mostly less than 1 percent,
investors are seeking other ways to get a slightly higher
yield. Thus, dividend-paying stocks are back in favor
as they offer income and potential appreciation.
chase for yield has led many firms to start paying dividends,
even those that are anything but the staid company that
grandma and grandpa may have owned.
example of a high-profile company jumping on the dividend
bandwagon is Apple, which offered its first shareholder
dividend last year.
that dividend-investing is trendy, experts warn that
buyers need to be cautious and understand what they're
dividend-paying stock offers a yield to shareholders,
payable at certain times of the year. That income can
be reinvested to buy more shares or deposited in the
shareholder's bank account. Stock dividend dates are
set by the company and are a timeline of when the income
will be distributed.
looking to add dividend-paying stocks need to consider
what's in their entire portfolio, said Joe Lucey, president
of Minneapolis-based Secured Retirement Advisors.
how they fit in your portfolio. This should be money
that you put in your long-term investments, money that
you don't need," he said.
Hackett, president, Hackett Financial Advisors, in Boyton
Beach, Fla., said one should start with companies that
have a solid record of paying dividends. "You want
to look for a business that endures. You want to make
sure that it's around for 30, 40 years. Selling things
like cereal and cheese has worked for a long time,"
also said to seek a company that regularly raises its
dividend. "Don't make the classic mistake of looking
for a company with the highest yield. They can dramatically
cut that yield. It's better to have one that has a 3
percent yield that consistently grows 5 to 8 percent
for 30 years," he said.
a stock just for its high yield is risky, and in this
current environment, it's especially concerning, Southward
said. "That's the No. 1 red flag. People are chasing
yield in this environment like I've never seen. We've
seen some extremely high yields surface," he said.
said when researching companies, pay attention to a
firm's peer group. If the yield is 2 percentage points
higher than the rest in that sector, that's a bad sign.
The company's quarterly reports should show strong earnings.
"If financial net income is falling quarter after
quarter, it's a concern," he said.
also said investors need to realize that since these
are stocks, they can lose their principal. Investors
who want to keep their principal are better off in Treasury
bonds or highly rated municipal bonds. "There is
credit risk, of course, but there's always going to
be a trade-off between safety … and growth," he
can choose from individual firms, mutual funds or exchange-traded
funds. Hackett prefers building a portfolio by researching
individual companies to avoid paying fund manager fees.
Some companies offer a dividend reinvestment plan, where
shares can be bought directly and income reinvested.
those who don't have time to research individual firms
and still want diversification, Lucey and Southward
advocated buying exchange-traded funds and focusing
on low fees.
are two types of dividend-paying stocks, common and
preferred. Both Hackett and Southward like preferred
stocks for those who are focused on income. Preferred
stocks usually have a guaranteed fixed dividend, whereas
common stocks have variable dividends. Preferred stocks
can be "callable," meaning the company has
the option to repurchase the shares at any time for
high on a preferred-stock program. ... It's a type of
security that doesn't tend to show a tremendous amount
of volatility, unless there's a major market correction,"
Southward said, suggesting the Powershares Preferred
ETF (ticker: PGX), as a top pick. It has a 6.4 percent
yield and an expense ratio of 0.5 percent.
said when picking one preferred stock, start by looking
at the company's credit rating and the stock's callable
date and yield.
common stock, Hackett said his No. 1 sector is water
utilities, and then food. Southward said to focus on
expense ratios in common-stock ETFs.
a strategy and look for extremely low expenses, like
Vanguard (High Dividend Yield ETF; VYM). It has a yield
of 3.36 percent and an expense ratio of 0.13 percent,"
new investors need to know that dividend income is taxed.
How much it is taxed depends on how long one holds the
income and the person's tax bracket.
income you get from dividends you have to pay taxes
on, unless it's in an IRA," Hackett said.