The U.S. market may not be a bargain, but a lot of stocks sport dividend yields that beat the pants off Treasury bonds. The economy is growing nicely, and many companies are loaded with cash, so it’s not hard to find firms that pay well today and are likely to boost their dividends in the future.
What could go wrong: Well, we’re talking about stocks, so risks abound. A company’s results could fall short of estimates; an entire industry (think coal) may go out of favor; or the economy could sour, dragging down most stocks. And, of course, dividend payments are not guaranteed.
How to play them: You can find plenty of good funds that focus on dividends. Start with Vanguard Dividend Growth (VDIGX), a member of the Kiplinger 25. As its name suggests, the fund focuses on companies that manager Don Kilbride believes will continue to boost their payouts. Biggest holdings at last report were United Parcel Service, UnitedHealth Group and insurer ACE Ltd. The fund yields 2.0%. For more income, consider Schwab U.S. Dividend Equity ETF (SCHD), which yields 2.9%. Although the ETF owns dividend growers, its main emphasis is on stocks with steady records of paying dividends; its biggest holdings are Chevron, Home Depot and Intel.
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But Josh Peters, editor of the Morningstar DividendInvestor newsletter, says it’s not hard for investors to identify solid individual dividend payers themselves. “You don’t necessarily need to be a pro to own Johnson & Johnson or General Electric,” he says. In fact, General Electric (GE, $25, yield 3.7%) is a favorite of his. The company has been restructuring to return to its industrial roots, and the stock, which fetched more than $60 in 2000, is cheap, Peters says.
Also appealing are stocks in two widely dissimilar industries: American Electric Power (AEP, $56, 3.8%), a Columbus, Ohio–based utility that delivers electricity in 11 states, and Ford Motor (F, $16, 3.7%), which is benefiting from surging auto sales.
Another fertile area for dividends is property-owning real estate investment trusts. REITs don’t have to pay income taxes on their profits as long as they pass at least 90% of them on to shareholders each year. Not only do REITs deliver above-average yields, they help diversify a portfolio because they often move out of sync with the rest of the stock market. Marilyn Cohen, CEO of Envision Capital Management, recommends Government Properties Income Trust (GOV, $23, 7.5%), which buys buildings and leases them out to federal and state governments. She also likes BioMed Realty Trust (BMR, $23, 4.6%), because it mainly leases space for labs and other scientific work to the drug and biotech industry. The spaces are so specialized that tenants rarely move, she says.
Finally, if you think oil prices have stopped falling, you’ll earn a decent current return—and probably some capital gains—by investing in an energy giant. And even if oil prices go lower, none of these companies is going away: Chevron (CVX, $105, 4.1%), ConocoPhillips (COP, $62, 4.7%), ExxonMobil (XOM, $85, 3.2%) and Occidental Petroleum (OXY, $73, 3.9%).