Investors count on
dividend-paying stocksto provide them with regular income
and a smoother ride than more aggressive investments. Now
that the bear market in equities has turned the logic of the
dividend-stock world upside down, smart investors are looking
beyond their usual hunting grounds to find the
best dividend stocks.
How the rules changed
Before 2008, dividend investors found many attractive
stock prospects from two industries: financial companies and
utilities. With financial institutions primarily making money
by borrowing money cheaply and lending it out at higher
rates, investors could expect regular, predictable profits
that would support increasing dividend payments as those
institutions grew.
Similarly, many saw the utility industry as the haven for
the most conservative investors, with utility stocks earning
a reputation as "widows and orphans" investments that would
provide healthy amounts of income for shareholders without
much risk of loss. Regulated by government agencies, many
utilities could count on modest but nearly guaranteed profit
margins in exchange for providing the services their
customers needed.
Yet both financials and utilities have
lost their good reputationsamong investors. Financials
saw their shares decimated in the market crisis last year, as
even huge banks like
Wells Fargo (NYSE: WFC) and
Citigroup (NYSE: C) resorted to cutting their
dividends to conserve cash. And while many utility stocks
have maintained their dividends, others, including
Constellation Energy and
Great Plains Energy , have had to cut
dividends substantially.
Where the dividends are
So what should conservative investors do to maintain
the dividend income they need? One idea is to look beyond the
financial and utility sectors to seek out other stocks with
good current dividend yields that appear to be
sustainable.
To find them, I looked at a full range of
sector ETFscovering the rest of the market's industries.
I compared not only their dividend yields but also their
returns over the past year and during the recent rally.
Here's a full list:
Sector
Dividend Yield
6-Month Return
1-Year Return
Consumer Discretionary (XLY)
1.8%
48%
(14.7%)
Consumer Staples (XLP)
2.8%
22.4%
(10.8%)
Energy (XLE)
1.8%
32.5%
(31.7%)
Health Care (XLV)
2%
23.9%
(12.3%)
Industrials (XLI) Continued... |