NEW YORK (TheStreet) - At a time when bond yields are skimpy, plenty
of investors have been considering dividend-paying stocks as a source
of income. But when stock prices rise, dividend yields fall. And after
the recent rally, dividend checks have begun to seem meager. The
current yield on the S&P 500 is 1.76%, down from 4.12% at the bottom
of the market in March 2009.
For investments that still provide decent yields, consider dividend
funds. A top choice is *iShares Dow Jones Select Dividend*(DVY), which
yields 3.42%.
Holdings include cigarette maker *Lorillard*(LO), which yields 5.6%,
and power producer *Entergy*(ETR), with a yield of 4.5%. Another
compelling dividend fund is *Federated Equity Income*(LEIEX), which
yields 2.82% and holds *AT&T*(T), with a 5.8% yield.
To own a broad collection of dividend payers, try *MainStay Epoch
Global Equity Yield*(EPSYX), which yields 3.1%. Besides holding top
U.S. dividend payers, MainStay also buys foreign companies. The global
approach provides an advantage because many overseas companies yield
more than their U.S. counterparts. The geographic diversification also
helps to make the fund's income stream particularly reliable. If
companies in one region suffer, holdings in other countries may
continue to prosper.
Portfolio manager Eric Sappenfield is wary of sluggish companies that
pay high dividends. Instead, he prefers steadily growing businesses
that can increase their dividends every year. Of the approximately 100
stocks in the portfolio, 90 increased their dividends last year. The
average dividend increase was 11%, a substantial hike that indicates
the companies are confident about their prospects for future growth.
In 2008, 61 holdings increased payouts, a noteworthy achievement in a
year when many blue chips slashed their dividends.
To avoid dividend cuts, Sappenfield looks for rock-solid companies
that can increase earnings for years to come. He likes companies that
have plenty of cash flow to cover dividends. Many holdings use part of
their extra reserves to pay down debt or buy back shares. "We like
stocks with battleship balance sheets," he says.
Sappenfield's kind of steady stocks lagged during the rally of 2009,
when investors raced to take on more risk. But the MainStay fund has
distinguished itself in downturns, outdoing 90% of competitors in the
turmoil of 2008, according to Morningstar. During the past five years
the fund has returned 4.6% annually, outdoing 75% of competitors in
the world stock category.
Source: Thestreet.com
