Pay-Back Time: High-Dividend Stocks Could Be the Answer for Cautious Investors
Susan Scherreik 1994, New York Times News Service, St Louis Post-Dispatch (MO)
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 St. Louis.
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 by 1999.
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 investors.
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 stocks. …