Dividend stocks have long been regarded as "widow-and-orphan" stocks because they provide steady payouts and tend to fall less than others when times are tough. And when stock prices fall, dividend yields actually rise because they reflect a percentage of a stock's price.
In fact, investors seeking shelter from market volatility and economic cycles flocked to dividend stocks in 2011. And most held up much better than the Standard & Poor's 500 Index.
The top 100 highest-yielding stocks in the S&P 500 last year were up an average of 3.7%, before dividends, The Wall Street Journal reported. By comparison, the 100 lowest-yielding stocks were down 10% on average.
Meanwhile, some investors tapped into dividend yields of more than 4% -- more than double the feeble yields of 10-year Treasuries -- on the stocks of utilities, manufacturers, and telecom companies.
"The problem with going for capital growth is that you very often don't get it, and then you've got nothing - the investment just sits there," said Money Morning Global Investing Strategist and Editor of the Permanent Wealth Investor Martin Hutchinson. "Dividends are easy - you can drop them on your foot, as it were. All you have to do is figure out which companies are run by sharpies - and are paying dividends out of capital - and which companies have genuinely solid business models that aren't going away."
Still, buying dividend stocks can be tricky. Individual stocks are inherently risky because they are confined to one sector of the economy. As such, they tend to rise and fall along with the rest of their industry peers.
Many investors are solving that problem by turning to dividend exchange-traded funds (ETFs).
ETFs allow investors to capture income from a cross section of companies, without risking all of their capital on one sector. And because ETFs track broad categories of stocks rather than relying on active managers to pick securities, they provide some safeguards against loading up on the riskiest companies.
That said, here are four dividend stocks worthy of a look right now:
The SPDR S&P Dividend ETF (NYSE: SDY) became an investor favorite in 2011. It tracks the S&P High Yield Dividend Aristocrats index, which is based on 50 of the highest-yielding dividend stocks that have increased payouts in each of the past 25 years.
SDY includes companies of all sizes, and its focus on yield means plenty of small-cap companies can make the cut. Investors can go to bed at night knowing that any company that managed to raise its dividend in both 2008 and 2009 provides safety. The fund has more than $8 billion in assets, yields 3.2% and provided total returns of 9.8% in 2011.
The Vanguard Dividend Appreciation ETF (NYSE: VIG) focuses on dividend growth, rather than yield alone, to build an index of sturdy, high-quality names. The index is limited to companies that have upped payouts for the last 10 years, regardless of yield, and then applies a proprietary formula to weight them by market value. The top-10 holdings include stalwarts like McDonalds Corp. (NYSE: MCD), The Coca-Cola Co. (NYSE: KO) and Exxon Mobil Corp. (NYSE: XOM).
The fund has $7.9 billion in assets, yields 2.1% and returned a total of 10.7% in 2011.
WisdomTree SmallCap Dividend ETF (NYSE: DES) is a fundamentally weighted index tracking the performance of the small-cap segment of the U.S. dividend-paying market. These companies typically perform well as the economy emerges from recessions. The fund is non-diversified and follows a passive investment approach.
The fund has $269 million in assets, yields 3.8% and returned 2.76% in 2011.
- Finally, for investors looking for international exposure, there's the PowerShares International Dividend Achievers Portfolio (NYSE: PID). Its scope is limited to companies that trade in the United States as American Depositary Receipts (ADRs), so investors have the assurance that the companies adhere to U.S. accounting standards. The fund invests in only high-yield names that have boosted payouts in at least each of the past five years. PID has $569 million in assets, yields 3.9% and returned 4.42% in 2011.
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