Boost Your Returns: Dividends

Richards Bushnell follows financial news voraciously, and it has certainly helped him—he managed to get out of stocks before last year’s crash. But now that he’s getting back in, the Los Altos, Calif., editor and writer has been thinking about stocks a little differently. He’s buying up stocks that’ll pay him a dividend, a steady stream of income from their profits. One of his recent buys, pharmaceutical giant Bristol-Myers Squibb (BMY), offers a dividend that recently amounted to $550 a year on a $10,000 investment—a payment he gets regardless of whether the stock goes up. It’s all part of Bushnell’s plan “to get the most bang for my buck.”

Bang, indeed. The extra cash from dividends can offer investors a jump-start toward rebuilding their portfolios. If stock prices plateau or drop, dividends mean shareholders can still collect money; if inflation rises, dividends can blunt its impact. That’s one reason why, over time, dividend stocks have consistently beaten other stocks—returning an average 8 percent a year over the past 30 years, versus a measly 1 percent for nonpayers, according to Ned Davis Research. They’re good buys at this point in an economic cycle, too: Dividend payers typically gain more than twice as much as nonpayers in the six months after a recession ends.

The average dividend for the Standard & Poor’s 500 is currently only a little more than 2 percent. So the pros are paying close attention to certain types of companies that, for tax reasons, are legally required to pay most of their profits to shareholders. One such category is master limited partnerships, or MLPs, most of which are firms involved with energy pipelines and storage. They’ve seen their shares rally this year, but their dividends are still plump. Some real estate investment trusts, or REITS, are also appealing, even though their shares have been hurt by the recent slump. Annaly Capital Management (NLY), which we also recommended in our “Where to Invest: 2009” feature, focuses mostly on residential mortgages backed by Fannie Mae and Freddie Mac. That increases the likelihood the government will help out if its holdings get in trouble, which offers a big dose of comfort, says Cliff Remily, portfolio manager at Thornburg Investment Income Builder. Pros are also finding fat dividends abroad, where, again due to differences in tax rules, companies’ dividends are generally higher than in the U.S.

To be sure, abnormally high dividends can be a red flag, a sign that investors have given up hope in a company. The dividend yield is the annual dividend payment divided by the share price; when the stock price goes down, the yield goes up. But often, a high yield just means that the stock of a strong company is priced cheaper than usual. For example, uncertainty over how cap-and-trade legislation could affect utilities has weighed on the stock of American Electric Power (AEP). But that stock’s long track record for increasing its dividends makes it a favorite of pros like Stroik, and investors waiting for a rebound can collect a 5 percent yield.

Trusts & Partnerships

Annaly Capital (NLY)
Yield: 14%
Invests in residential mortgages backed by Fannie Mae and Freddie Mac. Debt is low compared with other REITs’.

Enterprise Products Partners (EPD)
Yield: 8%
Partnership with emphasis on natural gas storage and transport; it’s diversifying through acquisitions.

Stocks

AT&T (T)
Yield: 7%
Fears over how long AT&T will hold exclusive rights to the iPhone have hurt the stock. But wireless service is thriving.

American Electric Power (AEP)
Yield: 5%
The utility has paid a dividend every quarter since July 1910; that streak should hold even if a “carbon cap” passes.

Telstra (TLSYY)
Yield: 8%
Australia’s largest phone company benefits from strong wireless and broadband growth; new CEO is trying to improve contentious relations with the Aussie government.

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