A Bigger Bang for Your Buck

Corporate America is on a rejuvenation kick. Its goal is to reinvigorate the stuck-in-the-mud stock market. The good news is that the rejuvenation process will fatten your wallet.
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If you want to rejuvenate yourself, a good strategy is to get off your butt, go the local health club and work out or take some exercise classes.

Corporate America is also on a rejuvenation kick. Its goal: to reinvigorate the stuck-in-the-mud stock market, which has been languishing the past few months after shooting up a spectacular 70% in 10 months from its March lows.

The good news in this case is that the rejuvenation process will fatten your wallet. In brief, after stripping shareholders of $90 billion worth of stock dividends the past couple of years, Corporate America is reversing course in spirited fashion through a stepped-up flurry of newly initiated and heftier stock dividends.

The numbers tell the story. Last month, 96 public companies raised or initiated dividends, the highest monthly outburst since October 2008. And February, typically a big month for dividends, is likely to deliver even more increases. Already this month, the first seven trading days produced 39 dividend hikes from such companies as Colgate-Palmolive, News Corp., L-3 communications, United Technologies and Ross Stores.

In effect, a drought of stock dividends is turning into a mini-flood of such payouts.

Be thankful; it's a positive market sign, observes Richard Moroney, editor of the Dow Theory Forecasts, one of the nation's leading investment newsletters. Why so? Because, he notes, companies typically raise dividends when they're generating strong profits and cash flows, or when they feel optimistic they will do so in the future.

It's also good news for those yield-starved Americans -- which are most of us -- who are saddled with woefully paltry returns from such short-term financial products as money-market funds, one-year CDs and Treasury bills, as well as on their savings accounts (the majority of which are offering yields of under 1% if not under 0.5%).

Talk is widespread that 2010 could see a dividend frenzy, an output of payouts that could well exceed last year's 778 dividend hikes and initiations. Sounds good, but it could take several more years before the total level of dividends catches up with the numbers seen two years ago when 2007 produced 1,885 positive dividend announcements. In 2009, U.S.-traded companies announced 778 dividend hikes or initiations, versus 808 cuts and omissions.

Still, this year's dividend acceleration, along with the prospects of more to come, is promising.

Meanwhile, some observers suggest it behooves investors looking for a bigger bang for their buck to take a hard look at above-average dividend paying stocks that also offer capital gains prospects. Granted, dividend-paying stocks are not without risk, but the view is many people simply won't make it on practically zero percent returns from fixed-income instruments. The key in the dividend-playing game, it's felt, is to zero in on quality and shun risk.

Moroney is a strong advocate of above-average dividend stocks at this juncture, but he cautions against focusing too heavily on those names with very large payouts (4% or higher) because they're riskier, usually vulnerable to slow growth and have limited capital gains potential.

His favorites, plus their dividend yields, are Aflac (2.3%), Abbott laboratories (3.2%), General Mills (2.8%), Comcast (2.4%) and Johnson & Johnson (3.1%). Each is thought to have solid capital gains potential. The dividend for the S&P 500 stock index averages 2.03%.

Sam Stovall, the chief investment strategist of Standard & Poor's, recently picked the Altria Group formerly Philip Morris, with a yield of 6.75%, as his favorite dividend-paying stock.

San Francisco money manager Gary Wollin, who runs about $100 million of assets, thinks it's a poor choice. "I wouldn't own the stock," he says. "I'm never going to wake up in the morning and read where someone says cigarette smoking is good for you. You're living with an ongoing risk that tomorrow could bring another negative tobacco headline, and that just doesn't make any sense. In Altria's case, nothing is better than the wrong something."

Wollin's favorite dividend-paying stock is AT&T, which yields 6.6% and represents 3% of his assets. He also likes Con Edison (5.5%), Chevron (3.7%) and is taking a look at Kimberly-Clark (3.98%).

If you're a risk-taker, stock market guru Elaine Garzarelli of Garzarelli Capital Management sees what she says are some good values in several exchange-traded funds in high dividend-paying areas. They are SPDR Series Barclays High Yield Bond ETF, yield: 12.10% (symbol: JNK); Ishares Iboxx High Yield Corporate Bond Fund, yield: 9.48%, (HYG), and Annaly Capital Management, yield: 16.89%), (NLY).

The bottom line: Yield to the lure of high yield, but watch out if it's too high.

What do you think? E-mail me at Dandordan@aol.com

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