Stocks paying a dividend are important for investors ? Richmond ...

Semi-retired and living in part off investment income, Jeff Zwerdling wouldn?t consider buying a stock if it didn?t pay a high dividend.

The only way to get decent investment income is to invest in stocks, said Zwerdling, a Henrico County resident and attorney.

?There are a lot of really good companies paying good returns,? he said, pointing to Henrico County-based Altria Group Inc.

The tobacco giant, owner of Philip Morris USA, pays a dividend yield of 5.7 percent, the amount paid per share as a percentage of the stock price.

It sure beats the 2 percent to 3 percent returns that investors get on municipal bonds and the next-to-nothing rates on certificates of deposits, he said.

With interest rates near zero on government securities, dividends matter more than ever, investment experts say.

Dividends are rising and are on track to pay out a record amount this year, according to Standard & Poor?s.

Companies listed in the S&P 500 stock index paid $240.6 billion in dividends in 2011, up from $205 billion in 2010. The 2011 payout was the largest amount since 2008.

And the companies are expected to pay $252 billion this year, according to the S&P.

The primary objective of any investing decision traditionally is income ? the dividend payment, said Kent Engelke, chief economic strategist at Capitol Securities Management Inc. in Henrico.

?Capital appreciation amounted to about 30 percent of total return and was secondary.?

That notion got turned on its head in the late 1990s when explosive-growth companies became popular and investors looked for fast avenues to wealth.

?Buying stocks with a strong dividend yield is nothing new,? Engelke said. ?It was forgotten during an era that some thought was the new normal (1996-2007).?

A return to the norm was inevitable, he said.

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After a turbulent year in 2011, U.S. stocks basically ended the year flat.

The S&P eked out a 2.1 percent return last year ? and the gain was exclusively from dividends, according to Kanawha Capital Management?s fourth-quarter report.

Many companies reduced or suspended their dividends during the financial crisis to reserve cash levels and pare operations.

Now, even banks, which got slammed, are increasing or initiating payments to entice investors who may be hesitant to put their money back into stocks. Charlottesville-based SNL Financial reported that the number of banks initiating or increasing dividends grew nearly 58 percent in 2011 from the previous year.

Some companies like Apple Inc. prefer to hang onto their cash ? in Apple?s case, $97.6 billion ? and not pay dividends, claiming that cash gives them the flexibility to buy other companies.

Likewise, specialty insurer Markel Corp. in Henrico doesn?t pay a dividend, believing it can achieve superior long-term returns by reinvesting earnings in the profitable growth of the company, Vice President Bruce Kay said.

Others, however, have produced record cash flows, so over the past few years, they have given more and more back to shareholders, said Christopher J. Singleton, managing director of Kanawha Capital Management.

?Companies with growing dividends historically produce superior stock returns over time,? Singleton said. ?It?s not just the yield that is important but the company?s ability to raise that dividend.?

Take a hypothetical investment, Singleton said: Five years ago, an investor with $500,000 in two-year Treasury bonds could expect interest income of about $25,000 a year. Today, that same investor would earn about $1,000 a year.

?Ouch,? Singleton said.

?The Federal Reserve?s low interest rate policy benefits borrowers and should ultimately stimulate the economy, but the policy has really penalized savers ? particularly those relying on interest income to fund their retirement,? Singleton said.

?They need to either rely on less income by cutting their expenses, switch into investments that produce more income ? but they need to be careful from a risk standpoint ? and/or spend more of their underlying capital. The problem is if they draw down their capital, it?s not there to produce future income ? and that is a real dilemma for some folks.?

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An investor who put $500,000 in a generic group of large company stocks could expect about $10,000 a year, based on S&P?s current dividend yield of 2.1 percent.

That?s not nearly good enough for Zwerdling ? who receives an 11.8 percent dividend yield from Prospect Capital Corp., which makes loans to energy companies, and 9.4 percent from Gladstone Capital Corp., which invests in debt securities.

He also likes Redwood Trust Inc., which invests in mortgage loans and pays a yield of 8.5 percent.

Verizon Communications, another good payer, consistently makes money and pays 5.3 percent dividend yield, Zwerdling said.

?I love dividend paying companies, but the company has to have good fundamentals,? Zwerdling said.

He looks at historical stock prices, dividends, who?s in charge and how employees are treated before making an investment decision.

Zwerdling said he occasionally takes a risk, buying New America High Income Fund Inc., for example, a junk bond that pays a yield of 7.8 percent. ?People said, ?Are you nuts?? But I?ve had it for years and it?s done well.?

Not all his picks are winners. ?I?ve won most and lost some.?

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People not as investment savvy as Zwerdling may want to consider tried and true dividend payers like Richmond-based Dominion Resources Inc., Kimberly-Clark Corp., Procter & Gamble or PepsiCo Inc., investor advisers say.

These pay dividend yields of 3 percent to 4 percent, not the 8 percent to 12 percent yields that Zwerdling likes but some might find too speculative or risky.

Look for companies that provide essential services or products, like electricity, telephone service or consumer products, said James Cox, managing partner of Harris Financial Group in Colonial Heights.

?I dare you to pick up five items in a supermarket aisle that aren?t made by Unilever or Nestl?,? he said.

With the Federal Reserve indicating it will keep interest rates low for the next two years, dividends will be that much more important, he said.

?Nobody should allocate all their money in stocks, but if you want any investment income, choose to have equities that pay high dividends,? Cox said.

?If you look at the S&P over 10 years, 20 years or 30 years, the percentage of total returns from dividends is more than half.?

Source: http://forexmarkettrends.com/stocks-paying-a-dividend-are-important-for-investors-richmond-times-dispatch/

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