Now that dividend-paying stocks are no longer treated like sensible shoes on the set of Desperate Housewives, will the allure last?
Dividend-focused mutual funds, closed-end funds and exchange-traded funds have been on the rise for more than a year, with the latest entry set to make its debut in the fourth quarter.
The Vanguard High Dividend Yield Index Fund will be available as a traditional mutual fund as well as an exchange-traded fund. It will track the performance of the FTSE High Dividend Yield Index, a new benchmark, company officials said.
The new fund will be added to two other dividend-oriented funds in Vanguard's supermarket, and to an industry scrambling to offer products aimed at the lucrative baby boomer market as that generation prepares for retirement.
With their steady stream of income, dividend-paying stocks and mutual funds would seem a natural fit for income-hungry retirees.
As growth stocks of the 1990s outperformed, however, dividends became the unloved relative at the stock bubble party. Even beyond the market sell-off beginning in 2000, it was smaller-capitalization stocks - which rarely pay dividends - that performed best.
That trend has turned in the past few years to resemble historic norms, with dividend-paying stocks in the Standard & Poor's 500 easily outdistancing nondividend stocks so far this year.
"Dividends tend to act like an anchor, not losing as much when the market goes down but also not going up by as much when it rebounds," said Howard Silverblatt, S&P's senior index analyst in New York.
That analogy held up this summer, with dividend payers outperforming during the market downturn from May to July, and nonpayers outpacing during the August recovery.
According to Ned Davis Research, dividend payers returned an average of 10.1 percent annually between 1972 and 2005, compared with just 4.1 percent for nonpayers.
So is it too late to jump on the bandwagon?
Maybe, Silverblatt said. Companies are still increasing their dividends, but share buybacks are becoming more popular, he said.
No, says Duncan Richardson, chief equity investment officer for Eaton Vance Corp. in Boston. And here's why:
Demand for dividends is only going to continue as baby boomers search for income-producing investments, said Richardson, whose firm offers several dividend-oriented funds.
Why won't the bond market gather those dollars?
Richardson isn't foretelling a substantial jump in interest rates that would hinder bonds, but he does see continued bond-market volatility and a more attractive market for stocks.
"Stepping back from the market and looking at a 20-year view, the most prevalent thing is the tremendous decline in the level of interest rates," Richardson said.
Meanwhile, boomers who haven't saved enough - and that's just about everybody if you believe the surveys - will have to stay invested in stocks much longer into retirement, experts say.
Finally, Richardson noted, stock valuations today are attractive relative to bond yields.
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