Dividend Stock Investing: Two Sectors with the Most Stable Yields

By Martin Denholm

Despite the “sell in May and go away” investment adage, the stock market sauntered into the final day of May this morning holding steady after a furious spring rally. All three major indexes - the Dow Industrials, Nasdaq, and S&P 500 - are set to end the month at least around the same place they started it.

But don’t be fooled. The recessionary forces weighing on it will likely prove too much to bear, and stocks could merely be saving themselves for the next leg down this summer. Aside from that, a bear market rally of this magnitude simply isn’t sustainable over the long-term without another pullback along the way.

Over the past few weeks, we’ve prepared you for this by highlighting investment strategies that can not only protect you from this scenario, but also put money in your pocket, and allow you to invest with less money and risk upfront.

Here’s another great income-producing strategy that can help offset any downside - dividend stock investing…

Want To Buy A Dividend Stock? Look At These Four Areas First…

Investing in companies that give you money back for holding the shares can literally pay dividends.

It’s a strategy that works well in any market - but it’s particularly reassuring to have a stable source of passive income during a tough climate like this one. In addition, each dividend payment will reduce the original price you paid for the shares.

However, you must make sure you invest the right way. Keep in mind that dividend yields rise when stock prices fall, so in a market like this, it’s crucial that you don’t just chase after big numbers.

You need to dig a little bit deeper to make sure you don’t get stuck with a company that is all style, but no substance. While a fat dividend may be good PR and helps entice more investors to the stock, you need to make sure it’s solid. That means looking at its…

• Existing Cash & Cash Flow: How much cash does the company have on its books? Can it even afford to pay a dividend? While management can cut costs, the cash flow statement is harder to tweak. Take a look at this, plus its ability to generate cash flow from current operations, which it can dish to shareholders and reinvest back into the business. While short-term profits can fall, if a company has sufficient cash to protect the dividend, you’re in better shape than investing in one that doesn’t.

• Earnings Growth: While all companies endure short-term profit fluctuations, make sure a company has long-term earnings growth potential. Sometimes, if its potential is limited, it will sweeten the deal by paying more in dividends, which is not a particularly good long-term strategy - for them or you.

• Debt Level: While it’s not terrible for a company to have debt, the question is: Can the firm handle it? If the burden is too heavy, yet it’s still paying a cash dividend, it may not be sustainable for long.

• Dividend History: Does the firm have a good track record of raising its dividend - or at least holding it steady - through good times and bad?

Two Sectors To Consider For The Best Dividend-Yielders

When selecting dividend stocks in a bear market, it’s imperative to diversify away from volatile, vulnerable stocks.

For example, take the iShares Dow Jones Select Dividend Index ETF (NYSE: DVY). From trading in the mid $60s in early 2008, it got crunched when the financial crisis hit, as half its holdings were in financial shares.

And two WisdomTree ETFs recently combated the volatility in financials by removing the sector from two of its funds and renaming them - the WisdomTree Dividend Top 100 Ex-Financials (NYSE: DTN) and WisdomTree International Dividends Ex-Financials (NYSE: DOO).

Instead, look at sectors like Utilities and Consumer Staples, which traditionally churn out healthy dividends, as the companies within them generate critical repeat business, regardless of the economy. After all, everyone needs food, drink, electricity, and gas. As such, the balance sheet keeps ticking over and they’re able to withstand shocks better than others.

There are many utility-based ETFs, but take a look at the largest one - the Utilities Select SPDR (NYSE: XLU), which tracks S&P 500 utility stocks, or the Vanguard Utilites ETF (NYSE: VPU). The funds pay a dividend of 4.8% and 4.3% respectively. In addition, ETF Guide says the income received from the dividends is taxed at 15% rate, lower than regular income tax rates.

In the Consumer Staples area, consider the Consumer Staples Select Sector SPDR (NYSE: XLP), with a dividend yield just under 3%, or the iShares Dow Jones U.S. Consumer Goods ETF (NYSE: IYK)

For a broader exposure to dividend-yielding companies, check out the PowerShares High-Yield Dividend Achievers ETF (NYSE: PEY), which includes companies that have increased their annual dividends over the past 10 straight years. It also has a 12% and 14% weighing in the Utilities and Consumer Goods sectors respectively.

The bottom line with dividend-yielding companies is to look for solid, stable businesses (preferably in sectors more resistant to the recession that can generate repeat business regardless) that can grow both now and in future, handing you some healthy passive income in an economy where it’s tough to get it.

Disclosure: No positions

Comments

[fxmaven]

I think MLP's and Tobacco stocks deserve special mention due to stable businesses, high payout ratios. International Tobacco Stocks are also a great way to hedge against USD depreciation. BAT, ITY, PM, are all worth a look. Domestic tobacco has a bit more business risk due to anti-smoking legislation and regulation, although MO would benefit as their leading market share would basically become permanent, and they would have to cut advertising to basically zero, improving profits. No need to pay fund expense fees to own obvious reliable sources of dividend income. Disclosure: Long MO, PM, ITY

2009 May 30 08:47 AM

[YoYoMama]

I have a fundamental problem investing in tobacco stocks. Watching a grandfather and a father-in-law die from diseases caused directly from tobacco use will do that to you.

I appreciate the author's suggestions, but would have like to have seen individual stock recommendations. I'm also amazed at how CEFs are being completely ignored right now.

2009 May 30 09:24 AM

[erniem]

The day congress decides to tax MLPs as corporations will be the day their price falls 50%.

Face it folks, there are no safe havens out there, just gambles. My two "secure" dividend stocks have both cut earnings ( GE and Pfizer) as have my Canadian Trusts. And there may be more to come.

2009 May 30 09:53 AM

[fxmaven]

Smokers make their choice to smoke, and are well aware of the potential consequences. As an investor, and from an admittedly completely amoral point of view, there is almost nothing better to own in a Great Recession than Tobacco companies with non-USD revenue. Frankly I am amazed how much people still smoke and the money they spend (often 1,500-2,000 USD per person per year) on the habit. Operating margins are also excellent (20-30%).

Gold is proving to be good, but Alcohol for example is too competitive a sector as consumers trade down. Smokers are very loyal to their brands for some reason, although it is good to have diversification between high price producers (e.g. PM )and low cost .volume manufacturers (e.g. ITY).

2009 May 30 09:53 AM

[Smackdown]

Ernie, spare me your bullshit. There are no plans at all to do this. None. Maybe we'll get hit by an asteroid as well. I have been an MLP specialist for 17 years. There is not even a gurgle in congress over the tax issue. Are you shorting them by chance? Why bother with your groundless alarmist speculation. You should be in all cash. There is a better chance of a million other events that would hurt the investments you do like.


On May 30 09:53 AM erniem wrote:

> The day congress decides to tax MLPs as corporations will be the
> day their price falls 50%.
>
> Face it folks, there are no safe havens out there, just gambles.
> My two "secure" dividend stocks have both cut earnings ( GE and Pfizer)
> as have my Canadian Trusts. And there may be more to come.

2009 May 30 10:22 AM

[fortypercent]

thanks for this article, very informative and it made excellent saturday morning reading.
one reader commented that they would have liked some individual suggestions. here are two( full disclosure, i'm long in both for about two months) what are opinions of PSE or NGLS? should i sit and hold long-term?
seperately, in my little, just starting blog i posted one week ago three good yielders, CALM, DBD and ABT. these dividend payors have good quick ratios and acceptable payout ratios. i have no position in either, but would probably tell my friends to take a good look at CALM for buy and hold and reinvesting.

2009 May 30 10:44 AM

[Tomcat101]

My grandfather also died from smoking. However, I don't blame Joe Camel for that. No one twisted his arm to force him to smoke.

If they legalize pot I'll invest in that too. Fools will smoke pot whether or not I'm invested in it. I might as well make some money off of their foolishness.


On May 30 09:24 AM YoYoMama wrote:

> I have a fundamental problem investing in tobacco stocks. Watching
> a grandfather and a father-in-law die from diseases caused directly
> from tobacco use will do that to you.
>
> I appreciate the author's suggestions, but would have like to have
> seen individual stock recommendations. I'm also amazed at how CEFs
> are being completely ignored right now.

2009 May 30 10:58 AM

[gordon]

I have SVU(4% yield), GMR(19%), VZ(6.4%), and the closed-end CHY (9%)
Supervalu just raised div a penny to 70cents/yr.
General Maritime has confirmed $2/yr div. due to longterm charters(77% vessels)
Verizon div is safe for 2009, and in 2010. as long as wireless segment payment continues. Payout ratio looks safe.
Calamos is now at about a 5% premium but pays 8.5cents/month.
Yes, the 35% leverage has to be watched/considered. Riskiest of group.
good luck.

2009 May 30 01:59 PM

[Old Trader]

Regarding CEFs, I own a couple, but they're not without their risks, as well. Often, high payouts are the result of a return of capital...NOT a good thing. The transparency issue can also be somewhat problematic, since some CEFs have a considerable lag in publishing their holdings, so it can be hard to figure out just what your dollars bought today, when you purchase one. Finally, as a rule of thumb, CEFs are best purchased when they're trading at a discount to NAV. A good site from which to start investigating any particular CEF/ETF is etfconnect.com

2009 May 30 03:35 PM

[Living4Dividends]

Great Article, Smart Profits ! Kudos to you.

2009 May 30 07:47 PM

[Kellogg9]

I will have to look into this. I took a hit with EWD and hoping i can make up for it with some dividend holdings.

2009 May 31 04:42 AM

[mbkelly75]

Dividend paying stocks in a decline is a terrible idea - invest in t-bills or a money market fund instead????? HORSE PUCKY!!
Yes - average dividend stocks can cut dividends - So
What?? By using an average to determine what you should do is nothing less than investing by using a generalization. Generalizations are automatically wrong by definition!! Maybe I am not putting this clearly - but if you focus on dividend-paying stocks with a 5+ year record of RAISING dividends - re-invest the dividends in the stock that paid them as they come in - and keep them for as long as they continue RAISING dividends for the long-term - over a couple of decades - you will do VERY well. Is it instant gratification - NO - but in a core portfolio - you do not need instant gratification. What you need is solid results over a long term. You do not even need a huge dividend - the sweet spot for dividends (The Golden Ratio) is between 3.1% and 3.8%. Now there are some wonderful stocks that average that ratio over a 5 year period - that are paying a higher percentage right now - simply because the stock has dropped in this market and has not finished regaining it's former price. Buy outstanding stocks on sale and you will do well over the long term - no matter what the market does during that long term. When the market declines - your dividends buy more stock. That is not a bad thing over time.


On May 30 02:53 PM Richard Wendling wrote:

> Investing in dividend paying stocks in a decline is a terrible idea.
> If you are looking for income on your money invest it in t-bills
> or money market funds. Dividend paying stocks on average cut their
> dividends as soon as the market turns against them.
>
> For better investing strategies in a volatile market click on my
> web site above and read the documentation on it. Then review the
> model portfolio and see the amount of return on those stocks versus
> the market.
>
> There is another down leg coming but not just yet. When it comes
> those that are prepared will be financially rewarded. Those that
> are not will again be crushed under the Stock Exchange insiders wheels.
>
>
> For full disclosure, I am 100% invested in the market near term and
> when the decline happens I will also be invested 100% in the market.
> It's just a matter of knowing which stocks to own and when.
>
> Richard Wendling

2009 May 31 10:16 AM

[fxmaven]

Please let me know when MO, PM, ED JNJ, PG last cut their dividends. In fact they have raised them every year for the last 20 years.

Are you joking about treasuries & money market rates or what ? This is the worst financial advice I have ever heard in an environment of 0% rates and massive USD depreciation.


On May 30 02:53 PM Richard Wendling wrote:

> Investing in dividend paying stocks in a decline is a terrible idea.
> If you are looking for income on your money invest it in t-bills
> or money market funds. Dividend paying stocks on average cut their
> dividends as soon as the market turns against them.
>
> For better investing strategies in a volatile market click on my
> web site above and read the documentation on it. Then review the
> model portfolio and see the amount of return on those stocks versus
> the market.
>
> There is another down leg coming but not just yet. When it comes
> those that are prepared will be financially rewarded. Those that
> are not will again be crushed under the Stock Exchange insiders wheels.
>
>
> For full disclosure, I am 100% invested in the market near term and
> when the decline happens I will also be invested 100% in the market.
> It's just a matter of knowing which stocks to own and when.
>
> Richard Wendling

2009 May 31 11:32 AM

[fwallace55]

FLS... is a pretty good dividend choice with everything positive going for it.

2009 May 31 11:37 AM

[YoYoMama]

I don't blame the tobacco companies for my relative's death. But neither do I wish to support them with my hard earned dollars.

Just because people are stupid does not mean I should encourage the existence of those helps facilitate their stupidity. And that's exactly what one does by investing in these companies. You are giving these companies more $$$ in their pocket to continue doing what they do. If you disagree with what a company does, you put your money (or don't put it) where your convictions are and simply find another place for your money.

But please stop telling yourself you aren't aiding and abetting these companies by investing in them because it's simply not true.


On May 30 10:58 AM Tomcat101 wrote:

> My grandfather also died from smoking. However, I don't blame Joe
> Camel for that. No one twisted his arm to force him to smoke.<br/>
>
> If they legalize pot I'll invest in that too. Fools will smoke pot
> whether or not I'm invested in it. I might as well make some money
> off of their foolishness.

2009 May 31 05:54 PM

[Tomcat101]

You and I can hold hands in a field of flowers and sing Kumbaya, but that won't stop anyone from smoking, drunk driving, doing crack, or kicking their dog.


On May 31 05:54 PM YoYoMama wrote:

> I don't blame the tobacco companies for my relative's death. But
> neither do I wish to support them with my hard earned dollars. <br/>
>
> Just because people are stupid does not mean I should encourage the
> existence of those helps facilitate their stupidity. And that's exactly
> what one does by investing in these companies. You are giving these
> companies more $$$ in their pocket to continue doing what they do.
> If you disagree with what a company does, you put your money (or
> don't put it) where your convictions are and simply find another
> place for your money.
>
> But please stop telling yourself you aren't aiding and abetting these
> companies by investing in them because it's simply not true.

2009 Jun 01 07:32 AM

[shootpar2001]

Individual recomendations?
Risk/Reward dictate a more diverse selection (CEF's).

The 'Pro's' generally do good homework (qualified).
Look at (PSY) from Blackrock; got crushed like everything, but I have been getting paid all along and enjoying the rebound.

Disclosure: (PSY)



On May 30 09:24 AM YoYoMama wrote:

> I have a fundamental problem investing in tobacco stocks. Watching
> a grandfather and a father-in-law die from diseases caused directly
> from tobacco use will do that to you.
>
> I appreciate the author's suggestions, but would have like to have
> seen individual stock recommendations. I'm also amazed at how CEFs
> are being completely ignored right now.

2009 Jun 01 12:42 PM

[shootpar2001]

Calamos also has (CSQ) and (CGO).
Take a look, I am slightly underwater, but getting paid every month.



On May 30 01:59 PM gordon wrote:

> I have SVU(4% yield), GMR(19%), VZ(6.4%), and the closed-end CHY
> (9%)
> Supervalu just raised div a penny to 70cents/yr.
> General Maritime has confirmed $2/yr div. due to longterm charters(77%
> vessels)
> Verizon div is safe for 2009, and in 2010. as long as wireless segment
> payment continues. Payout ratio looks safe.
> Calamos is now at about a 5% premium but pays 8.5cents/month.
> Yes, the 35% leverage has to be watched/considered. Riskiest of group.
>
> good luck.

2009 Jun 01 12:46 PM

[donzelion]

A bet on tobacco is a bet on human stupidity (I saw, with a Philip Morris cigarette in my mouth as I type), and many such bets pay off over time. However, the big growth in profits comes from emerging markets, where most have neglected to tax (or even subsidize) tobacco. If those countries start implementing taxes (a great revenue boost), I'd expect earnings to drop for tobacco (and rise for pharmaceuticals, who would be the main beneficiaries since government hospitals tend to buy licensed products rather than generics).

Granted, most of the pharm sector has been falling off a cliff in terms of dividends as their cycle of 90s-era blockbusters lose patent protection, but I'd include them along with utilities (which have also seen their values ebb, unsurprising given how few power plants have come on line in the last 20 years), and various petrol plays. Pharm has the ability to produce incremental revolutions; utilities are even more of a staple than any consumer staple.

2009 Jun 01 12:54 PM

[YoYoMama]

Have I said even ONCE that not investing is stopping them?

Somehow you all are under the impression that I believe these companies can be stopped. I don't.

I simply put my convictions where my money is. I don't want to hand a tobacco company my money. Plain and simple.

Stop trying to twist my comments into something they aren't. You don't like what I say, but it's true. When you invest in a company, you are helping them by giving them cash, which enables them to continue doing what they do.

Please don't justify your choice by saying people are stupid, or that you can't stop the tobacco companies, blah, blah, blah. Like there's one person who really doesn't understand this. I simply live by my convictions. If you have no convictions in this area, fine, but don't vilify me because I might be right in saying you are helping the tobacco companies by handing them your $$$.

On Jun 01 09:16 AM dividendmachine wrote:

> Yo Yo mama : The tobacco companies fund the massive programs to stop
> underage kids from smoking,not the government
>
> Marijuana is illegal but that does not stop millions of americans
> from smoking it
>
> If it were legalized there would be more tax revenue and better programs
> to stop underage use of it
>
> The public invariably decides to do what they feel is best and as
> tomcat and others have correctly stated you are not stopping them
>

2009 Jun 01 05:20 PM