Dividend-paying stocks aren't just your Grandma's stock pick anymore. In these risk-averse-yet-yield-hungry times, more investors are turning to these stalwart market workhorses as a way to participate in the stock market's gains and earn a little income.
Dividend-paying stocks, or the so-called "equity income" funds mutual funds that own them, are companies that give investors a piece of their profits in the form of a dividend payout, typically quarterly. These companies tend to be larger, more stable companies that have been around a long time. Think 3M, General Mills and Medtronic.
Most investors own several dividend players, but probably don't think of them in such terms. Three-quarters of the stocks in the Standard & Poor's 500 now pay dividends, according to research from Brian Belski, Oppenheimer Asset Management's chief investment strategist.
Considering how much cash companies are sitting on, and how just over one-quarter of these companies have raised dividends over the past five years, "there is a lot more room for dividends to grow," Belski predicts. "If you are building cash up and giving it to shareholders, that's pretty exciting -- that's a real strong case to buy American and build credibility for equities again."
He thinks dividend-payers are a "burgeoning" asset class, which will look even more attractive to investors as they leave bonds over concerns about interest rates and global debt issues.
With money market funds earning next to nothing, and most Treasurys paying less than 3 percent, "everybody's looking for yield, but it's just not out there unless you want to get into junk bonds, distressed debt," or other riskier bonds, said Bill Frels, CEO of Mairs and Power, a St. Paul-based mutual fund company that owns many Minnesota-based, dividend-paying stocks.
Ben Marks, chief investment officer of Marks Group Wealth Management in Minnetonka, says one reason dividend-paying stocks are so attractive right now is because they are yielding as much as, if not more than, 10-year Treasury bonds. Plus the upside of having a high quality stock that can appreciate in value.
Take General Mills, which he owns. The dividend yield is 3.3 percent, higher than the yield on a 10-year Treasury bond. 3M, which has not only paid dividends for decades, but raised them annually, is paying 2.3 percent. Both also offer yields greater than the dividend yield of the overall market.