A Bird in the Hand

S&P sees dividend-paying stocks as a good way for investors to profit in this uncertain market period

By Joseph Lisanti

Investors were relieved that the Republican Convention ended in New York without terrorist attacks or any major battles between delegates and protestors. In anticipation of that nonviolent outcome, stocks rose sharply on the last day of the GOP meeting. Nevertheless, volume remained light as many traders spent time at the beach rather than sitting in front of their computer terminals.

Other news was decidedly mixed. There was further evidence of slower-than-expected growth in the semiconductor industry, oil prices eased a bit, and the August payroll gain of 144,000 jobs, while an improvement, did not exceed Wall Street's 150,000 expectation.

We believe that any gains for stocks will be labored in the weeks ahead, in part because the U.S. presidential election remains a statistical dead heat. Add that to the uncertainties surrounding oil, terrorism, and the slowing rate of growth in the U.S. economy, and you just might see a trading range for the rest of 2004.

That's the type of market in which stocks that pay dividends tend to shine. Through August, the S&P 500 was essentially flat for 2004, posting a total return of 0.43%. Over the same period, total return for the dividend payers in the index was 4.76%, while non-payers returned -8.55%.

We see this as a manifestation of the old adage that a bird in the hand is worth two in the bush. Investors appear reluctant to sell stocks that will give them another payment within three months. On the other hand, they may be perfectly willing to sell a stock that they bought only for its appreciation potential, if that potential hasn't been realized.

While dividend payers don't advance as rapidly as non-payers in a roaring bull market, their stability in flat and down markets tends to pay off over time. Since 1980, payers in the "500" have had an annualized total return of 14.86% vs. 12.22% for non-payers.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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