The stock market dive sent many risk-averse investors running
for cover. Given the uncertainty over how high interest rates will
go, the bond market is anything but a safe haven.
So what can a conservative investor do? One option is to buy
stocks that pay generous dividends.
Unlike Treasury bonds, which pay a fixed rate of income and may
not keep pace with inflation, stock dividends have historically
outpaced the inflation rate.
And with a goal of long-term dividend growth, investors can
relax a bit about daily gyrations in stock prices. Over the long
haul, they probably will get some capital appreciation, because
steady dividend increases tend to drive up stock prices.
The income-producing strategy may be particularly appealing to
younger retirees, who need a steady income stream and want some
equity exposure. Some financial advisers recommend that every
investor own at least a few high-dividend stocks.
Although the average yield on stocks in the Standard & Poor's
500 is just 2.9 percent, near its lowest level in six years,
investors can still find stocks yielding 4 to 5 percent, said
Geraldine Weiss, editor of Investment Quality Trends newsletter in
La Jolla, Calif.
The yield, which is the annual payout divided by the market
price of one share, is rising for many stocks as prices fall.
But even more important than the current yield is the outlook
for dividend growth.
"Companies that have the ability to raise their dividends year
after year can provide attractive income to investors over time,"
said Carol Lippman, securities analyst for A.G. Edwards & Sons in
As a rule, she recommends companies that have raised dividends
6 percent annually over the last decade.
First of America Bank, a regional bank based in Kalamazoo,
Mich., pays an annual dividend of $1.60 and was recently trading at
$37 a share, resulting in a yield of 4.3 percent.
Lippman said she expected the bank to raise its dividend 10
percent a year over the next five years. If it does so, the yield,
based on the original investment price, would amount to 7 percent
Earnings Fuel Dividends
Another criterion to use in looking for potential purchases is
forecasts of strong earnings growth, because that would generate
the cash needed for raising dividends. Joseph Tigue, managing
editor of Outlook, a Standard & Poor's newsletter, said earnings
growth of at least 10 percent annually is desirable.
Generally, mature companies with a large capitalization are
preferred. High-growth start-up companies plow most of their
earnings back into operations, instead of making payouts to
Another advantage of large companies in this uncertain market
is that their stocks tend to be less volatile.
A blue-chip stock that pops up on a list of large, strong
companies with solid earnings growth and high dividends is Philip
Morris. The company has raised its dividend every year for 25 years
and is attractively priced, newsletter editor Weiss said.
Investors should evaluate companies on individual merit,
because few sectors consistently produce high-dividend growth