Get Paid with Dividend Stocks (WSJ)

Shopping for Dividends in A Weak Market
By Ian Salisbury
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--It's been a rough year for dividends, but investors who want stocks with steady payouts may still be able to find them.

The financial crisis hit dividend investors particularly hard, in large part because financial stocks had long been their bread and butter. Overall, Standard & Poor's expects the total value of dividends paid by companies in the S&P 500 to fall to $191 billion in 2009 from $247 billion in 2008. Meanwhile, the prices of dividend-paying stocks have tumbled much more steeply than the rest of the market, posting average annual declines of 11% over the past three years, according to one benchmark.

Still, in some ways, the market's plunge highlights the importance of dividends, which in more normal circumstances can smooth market returns and help investors generate income. The more retirees can rely on regular payouts to cover living expenses, the fewer shares they'll have to sell each year to make ends meet.
"You don't want to have to sell shares at depressed prices at just the wrong time," says Reston, Va., financial adviser Mark Atherton. "Dividends help support a retirement distribution and reduce the chance you'll run out of money."

With stock prices still depressed, the average yield of dividend-paying stocks in the S&P 500 remains relatively high, about 2.6% compared to an average of 2% over the past 10 years. Investors do face the risk of a new wave of dividend cuts, especially with the economy being so slow to pull out of its recession.

"A lot of companies are paying dividends without making money," says Standard & Poor's analyst Howard Silverblatt. "They're putting their hands in their pockets."

One key will be watching what happens in the fourth quarter, says Silverblatt, since many corporations now in the midst of planning for next year will make their move then, if 2010 looks grim.

While the quest for dividends has gotten more difficult, fund managers say investors can still find attractive companies that make reliable payouts.

"If you look at the past few years, a lot of dividends reflected financial firms' profits in investment banking and mortgage underwriting," says Rick Helm, manager of Cohen & Steers Dividend Value Fund. As financial stock's share of the dividend stream has fallen - to about 10% of the whole from almost one third - he counts more on consumer staples stocks to generate income.

Among his holdings: Procter & Gamble Co. (PG), Altria Group Inc. (MO), and Wal-Mart Stores Inc. (WMT), a company Helm says weathers downturns better than other retailers, in part, because it sells so many groceries.

Another area not to overlook is master limited partnerships, according to Tom Cameron, co-portfolio manager of the Rising Dividend Growth Fund. MLPs, which invest in energy assets like natural gas pipelines, typically pass most of their profits out to investors, often translating into fat yields.

Energy Transfer Partners L.P. (ETP) and Magellan Midstream Partners L.P. (MMP), both in Cameron's portfolio, yield 8.6% and 7.9%, respectively, despite big run-ups so far this year. MLPs can have some tax advantages too, but investors should be aware they can be thinly traded with values tied to volatile energy prices.

(Ian Salisbury is a Getting Personal columnist who writes about personal finance; he covers topics including exchange-traded funds and separately managed accounts. He can be reached at 212-416-2241 or by email at ian.salisbury@dowjones.com.)