2009 turned out to be a great year overall for most stocks; nevertheless, dividend-focused investors weren't so lucky. Through the year, dividend payouts from the large cap S&P 500 (NYSE:SPY) fell about $52.6 billion, or 21.4%, from 2008. According to Standard & Poors, this is the largest drop in payments since 1993. Equity income investors have also had to deal with underperformance. As a category, dividend yielding stocks lagged the broad market and other sectors such as technology and emerging markets, as investors tilted their portfolios toward risk.
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Glimmers of a Rebound
There may be signs of a dividend rebound in 2010. The broad-based iShares Dow Jones Select Dividend ETF (NYSE:DVY), which follows a basket of stocks with the highest-paying dividends such as Kimberly-Clark (NYSE:KMB), has recently begun to outperform the broad indexes. Through December, DVY has nearly doubled the return of the S&P 500. Many analyst believe that the threat of widespread dividend cuts are behind us, as there have been zero cuts in payouts in December. Several of the highest yielding sectors, for example financial stocks, have already cut their payments down to nearly nothing. Widespread belief that the global economy is getting better is also spurring growth in dividend investing. More revenue from corporations with lead to better dividend coverage ratios and payouts for shareholders.
Adding Dividends to a Portfolio
The S&P 500 is currently yielding 2.16%, which is low by the historical standard of 3.8%, but remains attractive when compared to the paltry interest rates that Treasuries and money-market funds are paying. Combine this with the potential for stock price appreciation and you have a recipe for success. Adding a dividend component to a portfolio is easy. Investors can opt for the single ticker approach, either through the iShares Dividend fund or its SPDR-run sister, the S&P Dividend (NYSE:SDY). Both funds yield around 3.5%; however, investors can find higher yields by choosing some of the funds' constituent stocks.
High-Yield Players
Tobacco conglomerate Altria (NYSE:MO) currently yields near 7% and creates tremendous free cash flow. Through 2009, the cigarette maker returned more than 70% of its net income to shareholders through dividends.
Food distributor Sysco Corp. (NYSE:SYY) has raised its dividend every year since going public 40 years ago and currently yields 3.5%. Restaurants account for nearly 65% of Sysco's sales, and that number is expected to total $36 billion this year. Even with tightening budgets, U.S. consumers are projected to spend about 48% of their food budget on restaurant meals. This bodes well for Sysco going forward, as the company recently raised its payout by 4%.
After its recent spinoff of Mead Johnson (NYSE:MJN), its infant nutrition division, drug maker Bristol-Myers Squibb (NYSE:BMY), has been left with a large cash hoard. Facing the second-largest exposure of any U.S. drug company to expiring patents, the company now has the ability to invest in new drug pipeline or acquire one via an acquisition. In the meantime, investors are rewarded with an increasing 4.9% dividend yield.
Bottom Line
In 2009, the "easy money" was made on riskier assets, but investors are returning to dividends for their stability and income. Investors may want to orient their portfolios toward a dividend strategy either by choosing an ETF that focuses on dividend stocks, or by choosing individual high yielders. Sysco, Bristol-Myers and Altria are great choices for any portfolio. (Learn more about the importance of dividends, see: The Power Of Dividend Growth).
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