YOUR RETIREMENT
PLAN, SAVE & MAKE YOUR MONEY LAST
PRINT
EMAIL
DEL.ICIO.US
DIGG THIS
Think of dividends and you may conjure up visions of carefree retirees using checks from utility stocks to pay for greens fees and trips to Hawaii. But dividend-paying stocks don't have to be stodgy. Whether you're 25 or 75, you can use dividend trends to flag solid growth companies run by managers who truly care about their shareholders. And how do you do that? Easy -- by finding companies that shower investors with more cash, year after year.
U.S. companies have plenty of money to share. Last year, they earned $1.8 trillion and "returned" $660 billion to stockholders. Two-thirds of that money flowed indirectly to investors when companies bought back their own stocks, a move designed to raise prices by spreading profits across fewer shares. However, companies often recycle many of the shares they buy back, giving them to employees and other holders of stock options. That practice can dilute the effect of the buyback.
RELATED STORIES | |||
 |
Three Solid Rising-Dividends Funds | ||
|
|
Kiplinger's Stock Finder | ||
|
| Latest Stock Coverage | ||
But cash! Now there's a sure thing. And there's rarely been a better time to collect it. That's because the federal tax rate on most dividends is just 15%. Since 2003, when Congress cut taxes on dividends, more than 300 U.S. companies have initiated cash disbursements, and hundreds of others have raised once-token payments to meaningful levels. Last year, some 2,000 companies boosted their dividends.
Don't confuse dividend excellence with stocks that yield the most (yield is the annual cash dividend divided by the stock price). In fact, a high yield can be a warning that something is amiss with the company and that it is likely to cut the distribution. That was the case with both Ford Motor and General Motors. Because of big share-price declines, their yields climbed as high as 10% before both automakers whacked their payouts. In addition, some dividends may not be as valuable as they seem to be, because of the impact of taxes. For example, most dividends from real estate investment trusts are taxed at regular rates, up to 35%. REITs are perfectly fine for your IRA, but look for stocks that pay dividends that qualify for the 15% rate to stash in a non-tax-sheltered account.
It's not hard to find dividend-growth champs. Standard & Poor's, for instance, lists dividend "aristocrats," companies in S&P's 500-stock index that have boosted their dividends for at least 25 years in a row. Mergent, another supplier of financial information, names dividend "achievers," companies that have boosted payouts for at least ten years and have met other criteria. If you prefer to let a pro pick the stocks, we identify three solid funds on page 36 that focus on payout boosters. Below, we use four different dividend-growth strategies to identify eight promising stocks.
All-around champs
These are the companies that boost dividends year after year after year. S&P says that over the past 15 years, its 59 current aristocrats have produced an average total return of 13% annually. That exceeds the return of the S&P 500 by an average of two percentage points per year. Moreover, S&P's dividend royals have provided those superior returns with below-average risk.
Who are these overachievers? Many are banks and insurers, both of which usually pay high dividends. Financial companies rarely carry high long-term debt loads and don't need to invest heavily in research and development or in expensive manufacturing facilities. Therefore, they accumulate and retain a lot of cash. But some investors lump financial companies together with other plodders, such as electric utilities. That's a mistake.
A bank can be both a dividend champ and a growth company. M&T Bank Corp. (MTB) is a case in point. It has raised its dividend 18% a year since 1983. M&T's stock has been fabulous as well, with an annualized return of 24% since 1980. M&T's performance is all the more amazing considering that the company operates mostly in long-declining sections of upstate New York in and near Buffalo, where it's based, and Rochester. M&T's opportune acquisition of a scandal-tainted Maryland bank in 2002 gives it a foothold in a more-thriving area.
