If there's an upside to the market's downswing, it's that dividends are back in fashion. Now at roughly 2%, the dividend yield of the Standard & Poor's 500 is almost twice its late-2000 low. There are plenty of solid companies paying 3% or more (table). That beats the average money market return of 1.6%. If shares tumble, your total return won't be saved by the dividend yield. But owning a good dividend-yielding stock lets you collect hard cash while you wait for share prices to rebound.
Don't go straight for the companies with the highest dividend yields. When the dividend payout as a percentage of the stock price soars, it's because the stock has cratered and the market doesn't believe the dividend can be sustained. That's the case with Dynegy (DYN ). At its July 29 price of around $1.20 a share, the energy trader's 30 cents a share per year in dividends produced a yield of 25%. But the troubled company has announced plans to cut the dividend in half.
Income seekers should examine the steadiness of dividend payouts, the company's consistency in increasing them, and its capacity to pay them out of profits. Dividend histories are usually available from company Web sites or www.businessweek.com. Tobacco company Philip Morris (MO ) has historically paid out on average 59% of its earnings as dividends. But profits have risen faster than dividends lately, so the share of profits paid out in dividends has actually dropped to 53%, according to Thomson Financial/First Call. Plus, Philip Morris has an average annual dividend growth rate of around 7.5%. With its stock at $47.20 on July 29 and its annual dividend of $2.32, it had a 5% dividend yield.
In another traditional dividend-paying sector--real estate investment trusts--top players such as Equity Office Properties are yielding around 8%. But with commercial rents dropping around the country, investors should favor REITs that are diversified in property type and location, says Mary Farrell, senior investment strategist at UBS PaineWebber.
With many stock prices down 50% in recent weeks, now is a good time to pick up a cash return. Just make sure the earnings and dividend track record of the companies you pick are sound.
By Margaret Popper