Dividend-paying stocks are on a roll

ByABC News
August 8, 2012, 7:44 PM

NEW YORK -- They don't garner the level of hype tech stocks did when they were all the rage in the 1990s, but stodgy dividend-paying stocks that Grandpa and Grandma used to buy back in the day have quietly emerged as the new rock stars on Wall Street.

Statistics, courtesy of S&P Dow Jones Indices, tell the story best.

•There are now 402 companies in the Standard & Poor's 500-stock index that plan on paying a dividend this year, a level last seen in December 1999.

•More than $275 billion is expected to be paid out this year, topping the old 2008 record.

•Upwards of 70% of companies are expected to pay more this year than they did in 2011.

Another key to the dividend renaissance is performance. In the past 12 months, S&P 500 companies that pay dividends have out-gained non-payers by more than 9 percentage points. Payers are up more than 5% and non-payers are down about 4%, according to Howard Silverblatt, senior index analyst at S&P.

Driving the trend is the search for income in a low-yield world. Investors also prefer large-company stocks that are strong financially and perceived as safer and less volatile. Cash-rich corporations looking to show their financial strength also have the ability to return a bigger sliver of their profit streams to investors, which wasn't the case back in 2008-09 when cash flow and earnings were under siege.

"A dividend is a check in the mail. Investors are looking for income," Silverblatt says. "And there are not a lot of places to get it."

One place to get a decent yield now is the stock market. The S&P 500, a broad market gauge, now yields 2.25% annually. Many big companies pay out even fatter yields, such as General Electric, which sports a 3.4% yield, and drugmaker GlaxoSmithKline, which yields 5.1%. Even Apple, which will pay its first-ever dividend later this month, will offer an attractive yield of 1.7%.

Those plump yields sure beat the more traditional income alternatives. Interest rates on money market funds and one-year certificates of deposit are less than 1%. The yield on 10-year U.S. government notes is 1.65%, near a record low. The average yield on stocks is also competitive with 10-year A-rated corporate bonds, which are yielding 2.3% to 2.6% on average, according to Fort Washington Investment Advisors.

So it's no secret why investors are increasingly turning to U.S. stocks that are paying out a bigger portion of their profits in cash dividends.

The big question now is whether dividend-paying stocks — which are no longer cheap, and could be hurt by an increase in taxes on dividends if Congress lets the Bush tax cuts expire at year's end — can continue to lead the market, says Nicholas Sargen, a money manager at Fort Washington Investment Advisors.

"We are not sure," Sargen says, adding that continued low yields and more uncertainty will give dividend stocks a lift for a while longer.

Silverblatt says investors could see bigger dividend payouts down the road. He notes that companies are now paying out roughly 30 cents of every $1 of their earnings to shareholders in the form of dividends, down from 54 cents they have paid out historically.

"They can afford to pay more," he says, adding that whether they do will probably be determined by how comfortable they are with how tax policy will play out and the health of the economy.