The stock market may be showing signs of improvement, but there’s a serious “drought of dividends,” said Matt Krantz in USA Today. In the third quarter, only a scant 191 out of 7,000 listed companies increased their dividends, while 113 actually cut dividends. That’s bad news for yield-loving investors: Since 1926, dividends have accounted for nearly half of total returns. In down markets, they help cushion the blow of falling stock prices, and in a struggling economy they’re a good indication of companies’ confidence. Right now, that still looks shaky. Despite the market’s recent gains, “the fact that companies aren’t boosting dividends shows many don’t share the enthusiasm.” If things improve, investors eventually will “demand” dividends, says Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund, “but it’s going to take a year or two.”
That doesn’t mean you should give up looking for solid dividends in the interim, said Matt Koppenheffer in MotleyFool.com. “Carefully chosen dividend-paying stocks could be your key to superstar returns.” Just be sure to look beyond the current yield, and study the company’s financial statements, business stability, and dividend history. If a company is later forced to cut dividend payments, “it ends up being a double whammy”: You’ll be stuck with a smaller check each quarter, and “many of the dividend-loving investors who own the stock will run for the hills, causing the stock price to fall.”
Over the past year, dividend-oriented mutual funds have endured “one of the worst periods in memory,” said Michael Pollock in The Wall Street Journal. “The poor performance of such funds stunned shareholders who thought they had chosen a fairly conservative investment approach.” But now isn’t the time to “throw in the towel” on dividend funds and simply load up on bonds. Dividend-paying stocks offer better protection against inflation than fixed-rate bonds, and many dividend-paying stocks currently trade at a discount, making this “an opportune time” to buy. Also consider the tax benefit: The top federal tax rate on most dividends is 15 percent, while the top rate on bond income is 35 percent.