Dividend-paying stocks are back in fashion

Associated Press

NEW YORK — After years of being out of favor, stocks with healthy dividends are beginning to attract investor attention.

The interest has been sparked for a couple of reasons. Gone are the days when the stock market on average posted 20 percent annual returns, as was the case from the mid-to-late 1990s. So, investors who want equity in their portfolios and are hungry for income are turning to the dividend-rich utility, banking, telecom and oil sectors.

Also, in the past two months, large companies such as International Business Machines Corp., Pepsico Inc. and SBC Communications Inc. have racheted up their dividend payments. Others seem to be following suit.

In April, 1.89 percent of publicly traded companies with dividends tracked by Standard &Poor’s raised their payouts, well above the levels of the past two years. This upturn marks an abrupt reversal from March, when dividend increases were at their lowest level since 1991, the last time the economy was emerging from a recession, according to S&P.

Additionally, investors have less faith in reported earnings after Enron Corp. collapsed last year amid massive debt hidden in questionable off-balance-sheet transactions. This skepticism may lead shareholders to demand solid evidence of companies’ financial health, in the form of cash dividends.

But amid the attraction to income, there’s one important point to remember — many companies that are making bigger payouts to shareholders are putting less money back into their businesses, limiting their growth prospects.

It all comes down to finding a balance between stability and growth prospects. Consider this: of the 2,171 publicly traded companies that pay common dividends, only 8.5 percent of them had share prices above $10, expected full-year earnings to be higher than the previous year’s and could cover their dividend payouts with their earnings — characteristics associated with solid companies, according to data compiled for Dow Jones Newswires by Multex, a New York City research firm.

There are several things to consider when buying stocks that pay dividends. First, investors should ask themselves whether they want to be exposed to a particular industry, and if the stock complements the rest of their portfolios, according to Charles J. Kaplan, president of Equity Analytics Ltd., a research firm in Middle Island, N.Y.

Also, look for a company that has paid a dividend for a long period and that has consistently increased its payout, according to Geraldine Weiss, the author of "The Dividend Connection."

A favorable dividend yield — the annual return divided by stock price — can help too. In the utility sector, expect an annual dividend yield of about 3.5 percent, according to Rob Plaza, the sector analyst for Morningstar Inc., Chicago. This is significantly higher than the average dividend yield of 1.35 percent for all companies tracked by Standard &Poor’s.

Utility companies such as Exelon Corp. and Consolidated Edison — which are turning away from riskier power ventures — may be smart bets in the sector, considering the recent negative attention that some diversified power companies have been getting from regulators for their trading activities.

Another area for cash payouts is the oil sector, which has an annual dividend yield of about 3 percent. Companies with above-average payouts relative to stock price include Occidental Petroleum Corp. and ChevronTexaco Corp.

Income-rich banks, which tend to get rid of their cash by paying out dividends or making loans, also deserve a close look.

Copyright ©2002 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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