[Editor’s Note: This is the latest installment of a new series that will explore ways for investors to recover from the U.S. financial crisis.]
By Mike Caggeso
More companies have been bought, bailed out or bankrupted since this financial crisis began than most of us have seen in our lifetimes. And even as Wall Street’s dominoes keep falling, no one can be sure if the worst is over.
From here on – recession or not – targeting dividend stocks is one of the few strategies that will deliver income safely and efficiently.
In theory, dividends should prop up an investor’s portfolio during uncertain periods, or in market downturns. That’s because even if a company’s stock price falls, executives do all they can to maintain the firm’s dividend payout. That’s part of the reason that, over time, dividends have accounted for a major portion of investors’ total returns.
"EVTMX), FoxBusiness last year.," said Judith Saryan, manager of Eaton Vance Dividend Builder Fund (
Or anytime. In fact, over the last 100 years, 40% of a stock’s total return is from dividends. That’s not surprising. According to a study by Ned Davis Research Inc., dividend-paying Standard & Poor’s 500 stocks rose by an average of 9.4% a year between 1972 and June of last year, well ahead of non-dividend-paying stocks, which rose by only 1.8% annually during the same period.
“Dividends are a sign of quality," said Todd Ahlsten, manager of Parnassus Equity Income (PRBLX), said in an interview last year. “They force management to look at cash flow and how it invests in its business."
But not all dividends are created equal. As losses mount, Standard & Poor’s 500 heavyweights have been putting their dividends on the chopping block, cutting or outright eliminating them for an indefinite time period.
And these aren’t fringe companies and chump change we’re talking about…
Nor does the list end there.
Just yesterday (Thursday), in fact, motorcycle icon Harley Davidson Inc. (HOG) slashed its dividend 70%, the first such reduction since 1993. The move was aimed at conserving cash, but sent Harley’s shares down 8%. in a move that was aimed at conserving cash. And the Dow Chemical Co. (DOW)– facing credit-market uncertainty, lower product demand and legal problems related to a failed joint venture – yesterday cut its dividend 64%, the first such move in the company’s 112-year history.
But there are still hundreds of companies holding their ground in the global financial crisis.
These firms understand that continued growth and success depends on a large body of investors. And to keep them on board the companies must maintain – and hopefully increase – their dividend payouts.
DRIPS Aren’t Dropping
With the stock market’s wrenching decline, many company’s shares are trading at bargain levels. A company that’s been able to maintain its dividend usually represents a better value to its shareholders.
In the reverse situation, where stock values soar, dividend yields fall, meaning income investors have to settle for lower returns.
So, with stocks down and yields high, income investors should consider starting or stepping up dividend reinvestment plans (DRIPS).
In DRIPS, the dividends investors would normally receive as cash are reinvested back into the stock under their name. To start, investors often don’t even need as much as the price of a full company share.
For example, if you invest $20 in a stock that trades for $100 per share, the DRIP will buy you one-fifth of a share of that stock. The dividend is reinvested accordingly, as well.
Over time, money is reinvested back into the stock, giving you more shares. And with more shares, the more dividend income you’ll receive.
Among other advantages, although there is usually a nominal transaction cost involved, the DRIPS’ automatic reinvestments allow investors to skip full-blown brokerage fees, which aren’t conducive to such small purchases.
Among the cons, most DRIPs require investors to be registered shareholders, which entails a little more paperwork than being a regular, or beneficial, shareholder. To enroll in a DRIP plan, investors must buy shares through a transfer agent. The process can take up to eight weeks before your account is opened and fully registered.
Some DRIP companies also have maximum amounts you can invest and hold in their stock. And they vary by time periods – monthly, quarterly, annually and lifetime.
For the public companies that offer the dividend plans, DRIPs provide a stable base of long-term shareholders. And often, these value-minded investors tend to buy more when share prices are down, as opposed to short-term traders, who are apt to bail out on a price decline.
More than 1,600 public companies and American Depository Receipts (ADRs) have DRIPs, offering a wide choice of industry and market preference to potential investors.
But with so many to choose from, targeting the best ones can be a challenge without a broker helping you.
The Best DRIPs are…
The best DRIPs are from companies that have a high-yield and a track record of increasing their dividends.
In addition to RPM and Aflac, here are a few DRIP companies to keep your eye on. Not only have they hung onto their dividends in the worst financial crisis since the Great Depression, some have increased their payouts.
- Coca-Cola Co. (KO): There’s a reason “Coke” is the second most recognizable word in the world. The world’s biggest beverage-maker recently beat fourth-quarter earnings expectations, largely due to its ability to cut costs and promote demand with a rotating file of products. The company kicks out a 38-cent dividend every quarter. At its current share price of around $44.30, that’s a 3.45% yield. If that’s not enough, know that Warren Buffet owns 8.6% of the company.
- Intel Corp. (INTL): Intel is the market leader among chipmakers, dominating its competition by continually being the first to the market with the best product. It pays a 14-cent dividend every quarter, which at its current stock price represents a 4.07% yield.
- The Hershey Co. (HSY): The Pennsylvania-based candy and food maker has been a recession stalwart. It began paying dividends in 1930 – meaning it’s been making the quarterly payouts longer than most companies have even been around – and has been increasing them for 32 consecutive years, according to The Money Paper. Right now, its 30-cent quarterly dividend represents a yield of 3.32%. With its stock hovering a few dollars above its 52-week low, many of its DRIP investors are probably loaded up on Hershey shares like Halloween candy.
- Microsoft Corp. (MSFT): Microsoft is the largest software producer in the world, and has a firm grip on that title. The slowing demand for computers and computer software has taken a toll on Microsoft, but the projection of the industry and Microsoft’s dominance makes it one of the most stable tech stocks out there. Its current dividend yield is 2.72% on its shares, which kick out a 13-cent dividend every quarter.
- Exxon Mobil Corp. (XOM): Like the above companies, Exxon doesn’t need much of an introduction. The oil giant is one of the world’s largest companies, having paid investors dividends since 1882. Its 2.13% yield isn’t the highest in this small group of companies, but Exxon’s share price is one of the most stable.
If that’s not enough, here’s an extensive list of DRIP companies, and their minimum and maximum investment requirement.
It also details how much dividend income a company pays, how often, how long its paid dividends and whether it increased its dividend over time.
[Editor’s Note: So far, Money Morning’s “Financial Crisis Investing” series has covered 401(K) plan rescue strategies, and low-minimum mutual funds. In the midst of a financial crisis that's eradicated more than $6 trillion in shareholder wealth, the profit search facing U.S. investors is even tougher than ever. Money Morning is offering a new report that details the actual bear-market threat that’s posed by the ongoing federal bailout payouts and the stimulus outlays that are certain to follow. The report is free of charge, and details ways that readers can obtain a complimentary copy of The New York Times best seller, "Crash Proof," in which author Peter D. Schiff actuallypredicted both the housing bubble and the crash of financial-asset prices long before they happened. The book also outlines strategies investors can use both to avoid further losses and to ring up profits. To read our free report, and to find out more about this offer, please click here.]
News and Related Story Links:
Drip Investing – Step by Step
Sharing a Coke With Warren Buffett
The Money Paper:
Capsule Review for Hershey Company
DRIP Stocks That Accept Investments of as Little as $25.
Harley Chops Dividend 70% to Boost Cash; Shares Fall.
Dow Chemical lowers dividend for the first time.
Money Morning Financial Crisis Investing Series (Part III):
Mutual Funds With Low Minimums Can Put Investors Back on the Winning Path.
Money Morning Financial Crisis Investing Series (Part II):
Retirement Strategies: The Three Best Ways to Rescue Your 401(k).
Money Morning Financial Crisis Investing Series (Part I):
Retirement Blues: Financial Crisis Pulls Billions From Pension Plans, Crimping Consumers’ Dreams and Corporate Profits.