New Strategies for Dividends

By Ben Levisohn, Wall Street Journal

With investors increasingly worried about sluggish economic growth, the end of the Federal Reserve's bond-buying program and debt woes in Greece, dividend stocks are suddenly looking a lot sexier.

Such stocks—long the preserve of investors attracted by their steady stream of income and low volatility—are luring new followers.

The rally in dividend stocks is part of a broader move by investors out of growth stocks and into more-conservative sectors such as utilities and consumer staples. Earnings growth is beginning to slow as the bull market enters its third year, leading to a natural shift to stocks with more predictable returns—including ones that pay dividends.

Recent U.S. economic data has been subpar at best, with payrolls expanding by just 54,000 in May, well below economists' estimates, and the Federal Reserve is reporting disappointing regional manufacturing activity.

"Dividend strategies do well when growth rates are slowing and equity returns are tapering off," says Savita Subramanian, head of quantitative strategy at Bank of America Merrill Lynch. "We could see the market continue to reward dividend stocks."

Overall, dividend-paying companies in the S&P 500 increased their payouts during the past four quarters by 9% from a year earlier, to $213 billion. Some have announced steeper increases.

With companies booking handsome profits and sitting on record amounts of cash, there is plenty of room for further increases.

Strategists and managers were recommending dividend-paying stocks in 2010 during the market's midyear slump, amid similar worries about the strength of the U.S. economy.

After outperforming the broader market for the five months beginning in April that year, dividend payers trailed by 5.1 percentage points the following six months—after the Fed first hinted at a second round of massive bond buying.

An added bonus for dividend investors: With Treasury yields so paltry—the 10-year yield is back at 3%, near a multidecade low—income investors can build a portfolio that rivals government bonds.