Thinking of Buying a Dividend Stock? Read This First

| About: BlackRock Enhanced (BDJ)

By Carla Pasternak

I doubt you've ever heard of Howard Silverblatt.

Mr. Silverblatt is a senior analyst at Standard and Poor's. He covers a lot of topics when it comes to his work at S&P, but what's made him a hot commodity for reporters (and why I like to keep tabs on him) is his knowledge of dividends of S&P 500 components.

His position offers access to the raw data behind payments, and he compiles this information so we can know how many dividend cuts or increases S&P companies have announced and how much total cash that means for investors. In addition, he regularly gives forecasts on where dividend payments are headed. Given his background and unrivaled access, I always think his view is worth a listen.

Fortunately, the current news for income investors is good. Nearly 140 S&P companies have increased or initiated payments so far in 2010 -- with only two decreases (last year there were a total of 78).

Silverblatt predicts the good times will keep rolling. He sees a +5.6% increase in dividend payments this year over 2009, including a surge in announcements as we get closer to year-end.

But what's going to drive these payments? After all, we're still not even sure the recovery will hold.

Well, you may not realize it, but corporate America is currently sitting on its biggest pile of cash in history. The S&P 500 components are holding about $840 billion in their coffers -- an increase of +26% over the first quarter of 2009. (For reference, that amount of cash is equal to the GDP of South Korea.)

There's no doubt these companies will hang on to a lot of that money, but eventually some of it will find its way to investors in the form of share buybacks and more dividend increases.

Dividend Increases Are Only One Side of the Story

As income investors, however, we all know our total returns don't just rely on increasing dividends. They also take into account the appreciation of our capital. Dividends can rise sharply, but it means nothing if the value of our holdings falls.

With the market losing about -15% from its April 26th peak and volatility on the rise during the past few months, ensuring the safety of investments looks more important than ever. That's why despite the rosy outlook for dividend increases, I think the time may have come to rotate away from speculative plays to more "boring" high-yield investments.

The recent correction may be just a garden-variety pullback after a long advance. Still, concerns about a weak global recovery amid austerity programs in Europe, a tightening economy in China and continued high unemployment in the United States continue to weigh on the market.

With the economy still not robust, I recently wrote to my High-Yield Investing subscribers that I think now's a good time to be playing "defense." I'd suggest the same to you. (Just to be clear, I'm not saying that we're sure to see a prolonged downturn. Instead, I simply think it's a good time to start looking toward more defensive names.)

Investors can start by looking for stocks that have a long history of steady or rising dividend payments, as they tend to hold up better in down markets (as a bonus, look for companies with a large cash stockpile).

"Non-cyclical" income stocks -- those backed by companies that don't rely on the momentum of the broader economy -- may be a good place to look.

Disclosure: No positions

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