A Strategy That Pays Dividends

By Bob Moeller
WEAC Member Benefits

February 2003

Financial Planning Seminars
Achieving Financial Independence

We are continuing a series of articles on income investment alternatives to CDs, money market funds, and other short-term investments. Previous articles covered bonds and preferred stocks. We are in a period of much lower stock prices combined with no certainty about stock prices in the future. Some people are against new investments in the stock market. Still, it is time to examine good dividend-paying stocks.

The idea behind dividend investing is fairly simple:

• You want a solid company.
  
• You want a dividend payment that will increase over time, hopefully by more than inflation.
  
• You want a reasonable yield.
  

The underlying principle is that if you buy a stock paying a 3% dividend, and over the years the dividend doubles, the price of your stock should also double.

The examples I use below are just examples, not necessarily recommendations. They are designed to show you available stability. Here’s a Green Bay company that has never failed to pay its dividend each year since 1940. In fact, the dividend has been raised 4 cents per year per share for the last 15 years. Today’s (1/xx/03) stock price is about $40. The total dividend is $2.12, a yield of 5%.

The company? WPS Resources (WPS), a large Wisconsin utility company. How did the stock do while the market was collapsing? It stayed steady.

One principle to follow with any investment is do not get too much involved in any one company or industry. So, a non-utility company example is in order. Take Associated Bancorp (ASBC), also of Green Bay. Dividends have been paid without fail since 1970. Since 1986, dividends have been raised each year, from 16 cents to the current $1.24 rate. At $33, the yield is about 3.5%. Increases the last few years have been 10 cents per year. At that rate, the dividend might be $2.24 in 10 years or 6.8% on today’s investment. Plus, of course, you might expect the price of the stock to rise over time reflecting the increased dividends. Are the dividends guaranteed? No. That’s why you want to diversify and stick with companies that have long histories. Some of the older banks for example have paid dividends each year for over a century.

The top-yielding stocks now are frequently real estate investment trusts, or REITs. REITs invest in real estate such as apartments, shopping centers, office buildings, and storage facilities. They tend to specialize in one or two of the areas. Because of their legal make-up, they are required to distribute virtually all of their earnings to the shareholders. Your concern is where are they, what do they own, etc? One example would be Federal Realty (FRT). They own community shopping centers in mid-Atlantic states and California. Dividends have increased every year since 1986, with a current (1/xx/03) yield of 7.1%.

I could go on with examples. You might look at Bristol-Meyers (drugs) or Weiss Markets. Most attractive yields will be with banks (another example, USBank), REITs (example Archstone-Smith), or some select utility companies (example OGE energy). You might consider the closed-end DNP Select Income Fund, which buys many utility stocks and some REIT stocks, takes their fee (about 1%) and sends out a dividend of about 8%. Currently priced at a premium-to-asset value, you need to be careful at the current price. Many think it is overpriced, but if the premium diminishes, it might be a good buy.

Can you really get started with this kind of investing? Here’s how. The best source of information I’ve found is the Value Line Investment Survey, available at your local library, or at www.valueline.com.

I will be demonstrating what to look for in my seminars this spring. Check out the data on some company you read about or one featured in Value Line’s “highest dividend paying” companies section, usually about page 32 of the index section. Companies mentioned recently are several utilities, several REITs, Goodyear, Philip Morris, and others. Be careful of the very highest yielders like Northwest-ern at 17% in the November 22 issue. Obviously there’s high risk there.

If you do not have a broker, I’d recommend a discount broker like Quick &Reilly, www.quick-reilly.com (800) 793-8050; Muriel Siebert, www.siebertnet.com (800) 786-2511, extension 6228; or T. D. Waterhouse, www.tdwaterhouse.com (800) 839-2837. You are better off commission-wise to buy even 100-share or more lots. Make sure you understand the commissions before you set up the account.

Remember …diversify.

In summary, is it possible to do better than the current low, low money market rates without taking full stock market risk? It certainly is.

Posted February 10, 2003