So you're confused about where stocks are headed next, but you don't want to miss out on any upside by moving your money to cash.
Here's a time-tested path around this dilemma: Bet on dividends.
Wrongly considered Granny's investment specialty, dividends have actually been a powerful piece of "total returns" from stocks over the decades. Since 1929, dividends have accounted for 40% of stock market gains.
Yes, they got a bad name over the past couple of years as once-reliable companies cut payouts in the worst year for dividends in four decades.
Here's the big picture and a few select dividend plays.
Critical in a slow-growth era
Many companies pay dividends of 4% or more, much better than the paltry returns on money market funds, government bond yields and, for quite a while now, the stock market.Examples? AT&T (T, news, msgs) boasts an annual dividend yield -- that what it pays out to shareholders -- of 6.7%, a total of $9.9 billion a year. Altria Group (MO, news, msgs) and Philip Morris International (PM, news, msgs) -- two other favorite picks among dividend stock experts -- have dividend yields of 7% and 5%, respectively.
The risk? Corporate dividends are not guaranteed, as some investors have learned the hard way. After the credit crunch hit, many companies slashed dividends to survive, says Howard Silverblatt, a senior index analyst with Standard & Poor's. In total, companies zeroed out $58 billion in dividends last year.
But the cuts didn't come across the board. Though some industrial giants such as Black & Decker (BDK, news, msgs) did slash dividends, most came from banks, insurance companies and real-estate investment trusts -- prime dividend-paying areas and the sectors hit hardest by the credit crunch.
Beyond that, though, "high-quality companies that have a long-term track record for paying consistent dividends pretty much stuck to their plan," says Kelley Wright, who uses dividends as a key part of his stock-picking strategy at Investment Quality Trends.
Looking ahead, unless we get a "double dip" recession, we won't see a repeat of 2009's dividend devastation, the experts say. "Companies have been fairly proactive in cutting costs, so I think that most of the dividend cuts are behind us," says Bob Shearer, the manager of the BlackRock Equity Dividend Fund (MDDVX).
Though that double dip looks unlikely, we probably won't see a rip-roaring economy for a while yet either. Goldman Sachs (GS, news, msgs) economist Ed McKelvey thinks the economy will grow just 2% to 2.5% in the first half of this year, then slow down to 1.5% in the second half as the effects of government stimulus spending wear off.
This makes dividend income something most investors need to tap if they hope to make progress. If your stocks rise only 1% or 2% in value, payouts are critical. "Corporate profits growth will be sluggish. In this environment, dividends will be critical to total stock returns," says Gary Shilling, who writes an investing newsletter called Insight.
"If your goal is to get 8% return a year, then with a high-dividend portfolio with 4% return, you are halfway there," agrees Dan Genter, who manages the RNC Genter Dividend Income Fund (GDIIX).
The reliable differences
Experts also cite the following advantages with dividend plays:Dividend plays are "safer." Dividend payers tend to be more mature and stable companies that aren't likely to blow up on you. That's because in the early stages of a business, a company wants to keep the cash it generates to reinvest and grow. Once growth levels off, a good business will have excess cash to distribute to shareholders. Think Procter & Gamble (PG, news, msgs), with an annual forward yield of 2.9%, or Kellogg (K, news, msgs), with a yield of 2.9%, compared with a hot Internet startup.
Committing to pay out cash via dividends also exerts a desirable level of discipline on managers. "Having that discipline of paying the dividend makes the companies better operators," says Shearer, of the BlackRock investment company.
True, these stodgier companies might not go up as much in a big rally. But they don't usually fall as much in a typical bear market either. But, as once-reliable companies such as Citigroup (C, news, msgs) and Bank of America (BAC, news, msgs) have shown recently, nothing's a lock.
Unlike income from bonds, dividends increase over time. A key to dividend investing is to look for companies with long histories of increasing their dividends, so you get extra gains as they keep it up. Annual dividend increases of 10% are not unusual. And it all adds up. Over the past six years, the payout on a $100,000 dividend-oriented investment at Genter Capital Management rose almost 50% to $4,900 from $3,300, says CEO Dan Genter.
Dividend stocks are good for boomers. Because people are living so much longer these days, dividend plays may be better than bonds for many of the boomers now reaching retirement age, says Derek Rollingson, who manages the ICON Equity Income Fund (IOEIX). Unlike bonds, stocks will most likely appreciate in value during an extended retirement or semiretirement.
Continued: Picking the winners