Stocks that Keep on
Giving... Even as the Market Keeps Falling
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By: Martin Denholm
Managing Editor
Smart Profits Report |
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Published:
November 3, 2008
There are several interesting
correlations between sports and investing.
One of the truest is also one of the most fundamental rules: If
you want to be successful, it starts with playing solid defense.
When it comes to investing, the ability to play solid defense
can ease you through turbulent times much better than most
ordinary investors. And the concept here is simple: Defensive
investing means having some strong, dividend-paying companies in
your portfolio.
A 72-Year History Of Top Performance
The two main concepts that dominate the stock market climate are
fear and greed. While they're always prevalent, smarter
investors know better than to base their decisions on
fluctuating sentiments like these.
Instead, it's better to look for long-term drivers -- like
earnings growth, cash, and the ability of companies to pay
dividends to their shareholders. History shows that the latter
is a particularly smart way to go. From 1935 to 2007, more than
40% of the S&P 500's total return came from reinvested
dividends.
The beauty of dividend-yielding stocks is that they work well in
both rising and falling markets. SensibleStocks.com reports that
during the bull market of 1982 to 2000, dividend stocks actually
outperformed non-dividend payers by a considerable margin,
despite the underlying share price appreciation.
And in volatile, sinking markets like we're experiencing now,
it's comforting to know that you've still got a source of income
throughout the madness. You're essentially being paid for your
patience, rather than selling off like everyone else.
Let's look at some more benefits.
Dish Me Some Dividends... Three Reasons To Invest In
Dividend-Yielders
Lowers Cost: When you're picking up a regular dividend
payment per share every quarter, it's essentially like buying
a house, then renting it out to offset the payment and pick up
income, while the underlying asset appreciates at the same time.
And of course, since the Jobs Growth and Tax Relief
Reconciliation Act of 2003, investors have paid lower taxes on
dividends.
Provides Stability During Downturns: When the broader
stock market is under pressure and share prices are falling,
stocks that pay dividends are often considered one of the "safer
haven" investments, since investors are still receiving income.
In turn, it's good PR for a company, with the stock attracting
more investors and the share price potentially rising as a
result. Pay attention to the level of insider ownership of a
stock here. This is not a hard and fast rule, but if insiders
hold a big chunk of the company themselves, they're less likely
to be reckless with its money through overly ambitious projects
or ill-advised buyouts, and may well pay greater attention to
shareholder interests and dividends.
Keeps Management In Line: When an executive team is
dishing money back to its shareholders, not only does it show
sound business acumen to be able to do that in the first place,
it also keeps them honest. Knowing that dividend payments must
be met reduces the chances that they'll fritter your money away
on wasteful projects.
Of course, there are pitfalls too. So before I get to a couple
of investment options for you, let's look at those.
Dividend Drawbacks
Dividend Reduction Or Suspension: At a time when
obtaining credit is tighter than ever before, it's much more
likely that companies will reduce or suspend their dividend
payments. This is usually a last resort, as it signals to the
world that the company is having trouble raising cash and can severely impact its share price.
Twice The Tax... And Higher In 2010? Naturally, the IRS
needs to grab its piece of the pie -- and when it comes to
dividends, it's a double-whammy. First, it claims the regular
corporation taxes from the company. Then, when the company
passes what's left down to its shareholders, those investors are
then taxed on what they receive. In addition, the Jobs Growth
and Tax Relief Reconciliation Act that I mentioned a moment ago
expires in 2010, so we may see dividend taxes rise.
Lack Of Investment Options: Some argue that while
companies should be praised for rewarding shareholder loyalty
through dividends, it may also mean that it can't find other
investment options, or projects that would accelerate the
company's growth.
And beware companies that offer sky-high dividend yields. It
could merely be a crafty way to mask bigger problems.
And as share prices drop, dividend yields rise, which can be a
false dawn. Bottom line: If a company isn't growing its earnings
or its cash flow has shrunk, it may well be a bad sign. Make
sure you do your regular due diligence.
Where To Look For The Best Dividends
Right now, two of the best dividend-yielding sectors are
consumer staples and telecoms.
In the November Xcelerated Profits Report issue, my
colleague Jim Stanton recommended one of the best companies
within the consumer staples sector, which pays a dividend. One
of the advantages that this sector has during a downturn or
recession is that it continues to generate revenue through
essential repeat business. After all, consumers always need
everyday household items.
(As an aside, you can get your hands on Jim's specific consumer
staples recommendation by signing up for the Xcelerated
Profits Report. Just
click this link
for more details.)
In the telecom sector, firms like Verizon (NYSE: VZ, $29.67) and
AT&T (NYSE: T, $26.77) boast some rock-solid financials,
allowing them to pay a 6.2% dividend ($1.84 per share annually)
and 6.0% ($1.60 per share annually), respectively.
In the current climate, though, if you don't want to take the
chance on individual stocks, you can always diversify and lower
your risk by buying ETFs that hold dividend-yielding companies.
Take a look at...
SPDR S&P Dividend ETF (AMEX: SDY, $44.23):
Holding stocks like Pfizer, Fifth Third Bancorp and Consolidated Edison
Inc., this fund tracks the price and yield performance
of stocks in the S&P High Dividend Aristocrats Index.
PowerShares High Yield Dividend Achievers (AMEX: PEY, $9.28):
This fund's results try to correspond to the Dividend
Achievers 50 Index. Around 80% of its holdings are in companies
that have consistently raised their dividends. Its holdings
include Keycorp, American Capital
Strategies, BB&T Corp and Comerica.
Martin Denholm
Managing Editor
Smart Profits Report
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