Why Dividend-Paying Stocks Should be on Your "Buy" List

Market environments like this one are when dividend-paying stocks can be an investor's best friend.

Although the major indexes have shown signs of building a base in recent days, the market's overall performance during the past six weeks has been less encouraging.

Despite several big up days, the Dow Jones Industrial Average is still down more than 600 points from its May 1 close, and the Standard & Poor's 500 is off more than 5%.

Throw in some fairly severe volatility and you've got a lot of befuddled market players wondering just what to do next.

Those invested in dividend-paying stocks aren't rattled by the current low prices. They know that share-price dips offer lots of new opportunities to grab even more lucrative yields from many dividend-rich stocks, trusts and limited partnership shares.

The Value of Dividend-Paying Stocks

For newer investors raised on growth rather than income stocks, dividend yield is merely the annual return you can expect to receive on a stock investment as a result of the payment of shareholder dividends.

It's calculated by dividing the projected one-year dividend by the current price you pay to purchase the stock, generally on a per-share basis. (Note: We say "projected" because corporate boards can always vote to raise, lower or even eliminate a dividend if a company's financial fortunes change dramatically, though most stringently try to resist cuts.)

For example, if the stock of Company A is priced at $20 a share and it paid a dividend of $1.20 a share over the past year, then your projected dividend yield for the coming year should you buy the stock at its present price would be 6% - i.e., $1.20/$20 = 0.060.

If, however, the market turns lower, taking Company A's price with it, the projected dividend yield will rise, assuming nothing else changes. For example, if the stock price drops to $18 a share, the $1.20 dividend will then represent an expected yield of 6.66% ($1.20/$18 = 0.0666) for investors who buy at that price.

This is the situation the market's recent decline has created for many of the dividend-paying stocks that have followed the indexes down - and, in many cases, the difference in projected yield is substantial.

Consider, for instance, a stock like the Suburban Propane Partners (NYSE: SPH), a limited partnership that derives its income from the nationwide distribution of propane, natural gas, fuel oil and other energy products.

On April 30, just before the start of the market's recent downslide, SPH closed at $42.53 a share. That meant its annual dividend of $3.40 a share - the actual amount it paid over the prior 12 months - represented a projected dividend yield of 7.99% ($3.40/$42.53 = 0.0799) for anyone who bought the shares at that time.

That's a 7.99% return - even if the share price doesn't rise a single penny - one of the reasons investing in dividend-paying stocks is so attractive.

But wait. Suburban Propane took a pretty good hit in the ensuing market decline, falling to $34.80 a share by the close on June 4, when the Dow and S&P 500 hit their most recent lows.

That meant the same projected dividend of $3.40 now represented a yield of 9.77% ($3.40/$34.80 = 0.0977), an increase in return of 1.78% for investors who waited to buy SPH shares on June 4 - or added to existing positions to capture the improved yield.

Even better, Suburban Propane bounced back along with the Dow, closing on Thursday at $38.72 - giving buyers who timed it right a quick gain of $3.92 a share to go along with their higher yield.

Winning Dividend-Paying Stocks

Of course, not every dividend yield benefitted as much as SPH's from the market's decline, mostly because there aren't that many stocks offering 8.0% yields to begin with - but a huge number did. Using the time frame from April 30 to June 4, here are just a few added examples:

Buckeye Partners L.P. (NYSE: BPL) fell from $56.45 to $46.61, raising the yield offered by its $4.07 dividend from 7.20% to 8.73%.

TAL International Group (NYSE: TAL) dropped from $41.31 to $31.47, boosting the yield from 5.05% to 6.64%.

Leggett & Platt Corp. (NYSE: LEG) dipped from $23.67 to $19.78, upping the yield from 4.68% to 5.61%.

Emerson Electric Co. (NYSE: EMR) fell from $52.54 to $45.07, raising the yield from 2.81% to 3.28%.

Many of these top dividend payers have joined SPH in rebounding, lowering the yields again - but quite a few remain at or near their early June lows, meaning you still have a chance to buy now and capture their enhanced dividend yields. Some possibilities, with their June 14 prices and yields, include:

CenturyLink Inc. (NYSE: CTL), integrated telecommunications, $37.71 a share, 7.7% yield.

CVR Partners L.P. (NYSE: UAN), fertilizer and agricultural products, $20.47, 10.2% yield.

Entertainment Properties REIT (NYSE: EPR), theater and retail complexes, $41.47, 7.2% yield.

Lockheed Martin Corp. (NYSE: LMT), aerospace and technology, $83.33, 4.80% yield.

Arthur J. Gallagher & Co. (NYSE: AJG), insurance brokerage, $34.55, 3.9% yield.

The next time the markets sell off sharply, rather than bottom fishing among growth stocks, maybe you should just try locking in some greatly improved dividend yields. The opportunities stretch across the full spectrum of dividend-paying stocks - in every industry, from high share prices to low, and from rich to merely respectable yields.

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