Nasdaq: TROW

Dividend-Paying Stocks to Buy: High Yield from an Unexpected Sector

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Until recently you rarely if ever heard technology mentioned as a good sector to search for dividend-paying stocks to buy.

Technology companies for decades have eschewed paying dividends to shareholders - to grow, you had to spend money. They plowed their annual profits back into the company, spending on research and development or acquiring smaller tech companies that improved their product offerings.

Only the largest tech companies like International Business Machines Corp. (NYSE: IBM) ever paid meaningful dividends to their shareholders. If a tech stock paid a dividend, investors would take it as a sign that the company had matured and was no longer a growth stock with meaningful opportunities for appreciation.

In fact, a dividend declaration by a technology company could often lead to a sizable stock decline.

But those days have changed.

How Tech Companies Evolved Into Dividend-Paying Stocks

Tech stopped shunning dividends in the 1990s when tech stocks went through a boom phase.

That's because institutional investors have mandates that prevent them from buying anything other than dividend-paying stocks, and they felt they were missing the action in the technology and Internet sector. They began to pressure tech stocks to pay a small dividend so they too could participate in the runaway rally.

Since then we have seen many of the tech giants initiate regular dividend payments to their shareholders. They were never intended to be significant but things have changed dramatically in the last decade.

Today many of these tech giants have seen their stock prices decline as their cash balances increased. They have raised the dividend to the point that tech stocks can now be a meaningful addition to income portfolios - especially for pre-retirement investors looking for income streams that will still be healthy 10 years from now.

Here are a couple examples of some of the best sources of yield in tech.

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Don't Miss These Last Special Dividends in 2012

If you missed out on the rush of special dividends in 2012 or simply want to reap further rewards, there's still time to cash in.

That's because even if a fiscal cliff deal is reached, tax rates on dividends will probably still increase. If you add in the investment surtax included in U.S. President Barack Obama's healthcare bill, the top tax rate on dividends could almost triple next year, from 15% to 43.4%.

That is why companies are looking to help out investors in the way of special dividends in 2012.

"Tax rates on dividends are never going to be better," said Steve Joyce, CEO of Choice Hotels International Inc. (NYSE: CHH), on its last earnings call. "I don't know how much worse they are going to get, but they are going to get worse."

Special Dividends in 2012

Special dividends offer investors the chance to cash in on a large dividend payout before it's taxed at a higher rate, plus investors will enjoy higher share prices as special dividend-paying stocks get a bump from the news.

More than 420 special dividends have been announced just in November and December, which will soon exceed the 433 paid in all of 2011, according to S&P Capital IQ.

And it's not just special dividends that are helping investors - regular dividends are being altered as well.

Wal-Mart Stores Inc. (NYSE: WMT) announced its fourth-quarter dividend payout, originally scheduled for Jan. 2, will be paid on Dec. 27, and Costco Wholesale Corp. (Nasdaq: COST) and Oracle Corp. (Nasdaq: ORCL) also moved up their first 2013 dividend payments.

Costco not only paid out its first dividend of 2013 in December, it also issued a $7 per share special dividend, totaling $3 billion, to be paid on Dec. 18.

Wynn Resorts Ltd. (Nasdaq: WYNN) was another company in the past two months to announce a special dividend. Along with Wynn's $750 million dividend, some of the biggest payouts have been Brown-Forman Corp's (NYSE: BF.B) $853 million payout, a $1.1 billion payout by HCA Holdings Inc. (NYSE: HCA) and a $1.6 billion dividend by LyondellBasell Industries NV (NYSE: LYB).

Dozens of other companies have also rewarded shareholders.

"It's like a nice end-of-the-year gift," Jay Wong, a Los Angeles-based portfolio manager for Payden & Rydel, a money manager that manages $75 billion told The Wall Street Journal. "We anticipate that some others will probably issue special dividends before the end of the year, when they get a better sense of what's going to change in the tax structure and they assess their financial health."

So where can investors find the next payout?

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2013 Dividend Stock Forecast: The Road to True Wealth Starts Here

If you listen to the press, Taxmageddon is going to be a "nightmare" for dividend stocks.

There's only one problem with this scary story: It isn't true.

Of course, I'll be the first one to tell you I'm not in favor of higher taxes on dividends.

And it is true that if we fall off the "fiscal cliff" taxes on dividends will revert to the full income tax rate of each individual taxpayer.

For the top taxpayers that means the top rate on dividends will rise from 15% to 43.4% if dividends become fully taxable again.

However, that's not as bad as it sounds, which is why I believe dividend stocks will remain the place to be in 2013.

Here's why.

First institutional holders of dividend stocks are taxed at their own rate so they did not benefit from the 2003 cut in dividend taxes. That means they won't suffer from a new increase.

And even among individual investors, many have their investments in IRAs or 401(k )s or other tax- deferred accounts. These holders will continue to receive dividends that won't be immediately taxed.

As for those on more modest incomes, perhaps being retired and living mostly on their dividend income, they will pay taxes only at 15%, 25% or 28%.

These are the thresholds which have been indexed for inflation since 2001, meaning the vast majority of tax payers will never get close to the 43.4% figure that makes for great scary headlines.

But it's not just all about tax rates. There are other reasons why savvy investors should continue to invest in dividend stocks in 2013.

One of them is Barack Obama...

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Three Dividend-Paying Stocks Likely to Increase Payout

One reason investors are scared silly over fiscal cliff 2013 is the potential tax hike that will affect investing in dividend-paying stocks.

If Congress doesn't act the rate on dividends will revert to the ordinary income rate, which tops out at 39.6%, after it was lowered to 15% during the George W. Bush administration.

"It's a foregone conclusion the rates are going up -- it's just a matter of how high they go," Todd Lowenstein, a money manager with HighMark Capital Management Inc. told Bloomberg News.

But history shows dumping dividend-paying stocks because of higher tax rates is a losing game.

Even if tax rates go up, investors will fatten their wallets on companies that raise dividends because the money compounds over time, essentially paying interest on the interest.

And right now, there are plenty of good reasons for corporations to reward investors with higher payouts.

Why Dividend-Paying Stocks Will Increase Payout

Companies are sitting on $3 trillion of cash and can create badly needed goodwill by showing they're attuned to investor concerns about higher taxes, according to HighMark's Lowenstein.

Plus, if corporate tax rates climb, companies may want to increase their dividend payouts instead of paying more taxes on interest from that cash.

And it's about time, based on the miserly way companies have been treating investors.
Companies in the S&P 500 paid a paltry 27% of earnings to investors in dividends last year, according to research from Goldman Sachs Group Inc(NYSE: GS). Over the past 50 years, the payout ratio has rarely dropped below 40%.

In fact, the best companies are committed to boosting their dividends in even the worst economic times. Many of them are so predictable that you can narrow it down to the very day they'll pay dividends and, in some cases, even the size of the increase.

Three Dividend-Paying Stocks Likely to Pay More

Here are three companies with long track records that will almost certainly raise their dividends in the near future:

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