INCLINE VILLAGE, Nev. - In this prolonged low interest rate environment investors have flocked to dividend paying stocks. Rightly so. By just about any measure, the yields on equities are attractive relative to bond rates. The dividend yield on the S&P 500 is higher than the yield on a 10-year Treasury bond (1.6 percent).More recently, however, investors have sold these stocks for fear of the fiscal cliff and possible higher tax rates on dividends. For top earners, the dividend tax rate could leap from 15 percent to nearly 40 percent. In my view, the selling is overdone. Many dividend paying stocks are held in non-taxable accounts so tax rates don't matter. Plus, baby boomers will continue to need retirement income and there are few alternatives to dividends. High yielding corporate bonds? They are already taxed as ordinary income. Municipal Bonds? Maybe, but their yield is low. Retirees can't live off capital gains because they are too inconsistent. Dividends provide consistent cash flow, even when stock prices are down. When stocks fall their yields move higher, thereby providing a price floor in bad market environments.Many high dividend payers are concentrated in defensive sectors that fare well even in a weak economy. Of our favorite dividend paying stocks are AT&T (5.2 percent yield) and Verizon (4.7 percent yield). Nearly every smart phone customer is paying one of these two companies money every month, even for services they don't use. Pfizer (3.6 percent yield) British Petroleum (5.1 percent yield) are also attractive. Owning dividend paying stocks can be an important portfolio component for investors seeking income, even if dividend tax rates increase. Keep in mind that dividend paying equities are only one component of a portfolio invested for income, however. A portfolio should also include exchange-traded debt, stocks, emerging market debt, preferred stocks, and utilities. This is what I've written about in this column, and it is how I invest the majority of client accounts.- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
November 29, 2012 | Back to: News