Is This The Time To Buy Dividend-Paying Stocks?


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John Meredith is sure hot on dividend-payers. This year, the retired electronics engineer bought shares in seven dividend-paying companies:AT&T ( T ),Chevron ( CVX ),Cisco Systems ,Coca-Cola ,General Electric ,McDonald's andProcter & Gamble .

Three of the stocks' prices have risen in the stock market this year, while four have dipped as much as 2%. Together, this year the group has averaged a 1% gain. But the bigger reward: After Meredith bought their stocks, several companies raised their dividends -- a fetching 9.2% average.

Meredith now holds 14 dividend payers and may get more this year. "Given the inflation factor, it's a good strategy to have increasing income," said the resident of Colorado Springs, Colo. "And as a bonus, you get a more favorable tax treatment on stock dividends than on the interest from bonds."

His moves seem to buck conventional wisdom -- that those with retirement plans should shift to such "safer" investments as bonds. But amid today's longer life spans, some market players are embracing a newer view: that retirees should keep sizable stock allocations -- tilted toward dividend-payers with their potential for stock price gains and dividend income growth.

"There is literally a danger of outliving your money if you can't generate enough income from your portfolio," holds investment adviser Laurie Itkin, of Coastwise Capital Group in San Diego, Calif. Indeed, she feels "the typical asset allocation model of 40% bonds, 60% equities is archaic and even dangerous."

Meredith likes the dividend-growth story he's been seeing. Among the shares he bought,Cisco Systems ( CSCO ) this year raised its dividend 11.8%, andCoca-Cola ( KO ) boosted its payout 8.9%. He'd bought such stocks for the safety their strong corporate management provides -- and for their dividend yields in excess of 3%.

Too Rich To Switch?

"With dividend payers like these, you think harder about shifting your asset allocation to more heavily favoring bonds, even after interest rates rise," Meredith said.

Overall, fully 1,078 U.S. companies raised their dividend in this year's first quarter -- the highest number for any first quarter, says Howard Silverblatt, senior index analyst at Standard & Poor's Dow Jones Indices (SPDJI), in New York. Moreover, dividends paid by companies in the S&P 500 stock index could hit a record $350 billion this year, he says.

However, dividend-paying stocks weren't the rage early this year. And dividend cuts are always possible: In July 2009, at the peak of dividend-trimming in the last recession, 83 S&P 500 companies were cutting their dividends, while 26 others were suspending them, according to SPDJI data.

On the horizon, many experts foresee interest rates rising from today's low levels, which would hurt bond prices. And even though the trend would produce more alluring bond yields, "it wouldn't signal the need to sell dividend-paying stocks," holds Silverblatt. "Often, when bond yields go up, stock dividends also rise."

Looking ahead, some investment advisers see ways to be able to keep one's equities allocation at least steady -- even when bond yields get enticing. One possibility: substantially overweighting dividend-paying stocks in an equities portfolio, and as fixed-income issues mature, reinvesting them in higher-yielding bonds, says Keith Klein, owner of Turning Pointe Wealth Management, in Phoenix. Overall, he believes retirees should keep a very minimum 45% weighting to equities.

Siren Call Of High Bond Yields

But some experts have a different view. "Currently, in relation to bond yields, a portfolio of high dividend yielding stocks looks attractive," holds Robert Johnson, finance professor at Creighton University. But if bond yields hit "reasonable levels" -- say, to about 5% in the 10-year Treasury note -- he believes investors would cotton to a larger bond allotment and a "more conventional asset allocation." For retirees, he says that could translate to "more like 60% bonds, 40% stocks."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Mutual Funds
Referenced Stocks: T , CVX , CSCO , KO

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