Dividend-paying stocks an option for income

They can beat CD rates, but carry risk and require solid research

January 20, 2002|By Jeff Brown | Jeff Brown,KNIGHT RIDDER/TRIBUNE

Disgusted by making less than 2 percent on an income-oriented holding such as a money market fund or short-term CD?

Then think about stocks - dividend-paying stocks, that is. So suggests portfolio strategist Carol M. Lippman at A.G. Edwards, though she notes the selection has to be very, very careful.

Not many investors focus on dividends these days -not surprising since the average dividend yield among Standard & Poor's 500 stocks is a measly 1.34 percent.

Dividend yield is the last 12 months' dividend payments divided by a stock's current price. If you paid $100 for a share of stock yielding 1.34 percent, you'd receive $1.34 in annual dividends.

Some stocks, of course, pay more, making them attractive to investors seeking steady income. Lippman suggests several, including Equity Office Properties Trust, a real estate investment trust with a 6.57 percent dividend yield. These days, you can't even make that much on a 30-year bond.

She adds that choice dividend-payers tend to increase their dividends regularly, allowing investors to keep pace with inflation in a way that's hard to do with CDs, bonds and other fixed-income investments. Equity Office, for instance, has raised its dividend by a total of 11.25 percent over the last three years.

But if you are a fixed-income investor accustomed to buying bonds or CDs and forgetting them, take heed: Dividend-paying stocks are a lot riskier and require a lot more work.

A stock's dividend is only one thing to consider, even if the yield is very attractive. The investor must do all the analysis one would do with any other stock investment. And that work doesn't end when the stock is purchased; you have to keep monitoring it once it's in your portfolio. After all, it wouldn't be worth it to get a high dividend payment if the stock price collapsed.

Take an especially careful look at why a stock's dividend yield is so high. You might find, for example, that the stock's price has fallen dramatically. Dividing the same dividend by a lower share price produces a higher dividend yield.

The share price may have fallen because the company is in trouble. If it is, the board of directors may respond by cutting or eliminating the dividend payment.

Small investors also should be wary of having too many eggs in one basket, especially when it comes to stocks. You might be perfectly safe putting $100,000 into a federally guaranteed CD at your local bank. But if you're buying dividend-paying stocks you'd want to spread that sum around. Six, eight, 10, even a dozen different stocks wouldn't be too many. That means taking on a lot of research and monitoring chores.

How do you find high-yield stocks? Most newspapers include dividend payments or dividend yields, or both, in their stock listings. Many online services have stock-screening functions that can be set up to list high-yielders. Try the ones at Morningstar Inc., the fund- and stock-tracking firm, http://www.morningstar.com, and Quicken, the financial software company, http://www.quicken. com.

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