Word: dividenders
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...shock, then, that the share of earnings that S&P 500 companies pay as cash dividends has eroded steadily since the past recession, in 1991. Then companies paid out 75% of earnings as dividends. The ratio fell to an all-time low of 33% last year. Amid the current slump, some companies have cut their dividends--and others might join them as their profits get squeezed. Yet here's why dividend-paying stocks might come back...
BOOMERS RETIRING As the oldest members of the huge baby-boom generation approach retirement--and after the searing market drop this year and last--they will be looking for less risky investments. Dividend-paying stocks are just the thing. They tend to hold up better in weak markets because they guarantee income and yet preserve the likelihood of capital gains in a recovery. High yields may also signal value. The popular Dogs of the Dow strategy calls for buying the five highest yielding Dow stocks each year--usually the five whose prices have been beaten down the most. Results weren...
...INTEREST RATES Bonds, money-market funds and other interest-paying investments haven't carried yields this low since the 1960s. For income, it may make more sense to own a stock like Bandag, a profitable industrial-tire company with a dividend yield of 4.6%--about the same as on long-term Treasury bonds...
STRONG FUNDAMENTALS As investors look ahead to a recovery, they will favor stocks of familiar companies with solid balance sheets that do well on the rebound. Often such stocks also carry the highest dividend yields. Look at banks (AmSouth, U.S. Bancorp), basic materials (Dow Chemical, Lubrizol), energy (Consol Energy), manufacturers (Dana, Ford), real estate investment trusts (AMB Property, Federal REIT), utilities (Con Edison), and food and tobacco (UST, Philip Morris...
...REALITIES After years of soaring more than 20% annually, stocks are likely to rise much more slowly--something in line with, and maybe much lower than, the 10%-to-12% total return that blue chips have delivered over the past 75 years. As stocks' prices rise more slowly, their dividend income takes on greater significance...