Investing for income

For more than a decade, in many corners of Wall Street, income investors were considered out of touch. As tech stocks boomed and housing went through the roof, the idea of conservative, dividend-yielding stocks and old-fashioned annuities seemed like relics from another age. They were things Grandma put her money in, living off annuity checks and dividends from AT&T.

Turns out Grandma might have had it right after all.

Fast-forward to today, when a roiling stock market is making investors on Wall Street and Main Street queasy. Suddenly a stable portfolio that pays out decent income even in a flat market looks like a pretty attractive haven. In addition to dividend-producing investments and annuities, these assets include things like equity-income funds, real estate investment trusts, or firms structured as master limited partnerships.

Investment analysts note that dividend-paying stocks and funds are a potential sweet spot for long-term investors right now, since, dividend payers and growers should outperform as the cyclical bull market and expansion mature. Dividend stocks may face some short-term headwinds, though, since more conservative investments tend to lag in big market rallies.

Investing for income is especially savvy in an environment of sluggish economic growth. The economy grew 2.9% during 2010, a moderate pace widely considered disappointing for this stage in an economic recovery.

Even the most optimistic economists and politicians are predicting very slow growth, so doesn’t it make sense to get paid while you wait?

There’s nothing wrong with taking a 5-6% dividend and reinvesting it in your portfolio. And for retirees, of course, dividend income means they won’t have to liquidate their mutual funds just to have money to live.

Investors are seeing the appeal: Equity-income funds took in $18.4 billion during the last three months of 2010. And performance data suggests they’re on to something. Reports show that since 1972, companies that initiated and increased their dividends outpaced their non-paying brethren in total returns (including reinvested dividends) by a robust 8% a year.

Of course, investing for income comes with its own caveats. Don’t automatically load up on the highest-yielding stocks you can find, for one. That may be an indicator that a company is in dire straits, and has had to crank up dividends to attract investors. Instead, look to combine a healthy yield with strong long-term financial prospects.

Also, keep in mind that a company’s yield isn’t written in stone. During the worst of the financial meltdown, year-over-year dividend growth was the worst since 1939. Of course companies don’t like to cut their dividends, since it’s a sign of financial trouble and upsets millions of income-oriented investors. But when survival is at stake, dividends can, and do, get chopped.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/fidelity-income-investing&topic=investing-mutual-funds