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Dividend-paying investments becoming more attractive

September 17, 2011

Super-low interest rates might be good for refinancing mortgages. But for fans of fixed-income investments, not so much.

The Federal Reserve’s pledge in August to keep interest rates near zero for at least the next two years, to stimulate an economic recovery, has sent yields on 10-year U.S. Treasury bonds to historic lows.

On top of that, investors rushing to the safety of U.S. debt in the wake of a huge stock sell-off last month also helped send the yield on the benchmark 10-year note to an all-time low of 1.99 percent.

The disappointing return on the note has prompted an Indianapolis investment firm to give its clients an alternative—one that is just as conservative as the U.S. Treasury note but with better performance.

Woodley Farra Manion Portfolio Management has rolled out an equity portfolio stacked with nothing but dividend-paying stocks that can provide a reliable source of income.

“It’s just time for this product,” said Principal Don Woodley. “So many people rely on CDs and bonds, and they’re just not providing the income [investors] were used to just a few years ago.”

Not only are companies better positioned to maintain dividends, but investors looking for income also have few options. So the consensus among investment experts is that the focus on dividend-paying stocks will only intensify.

High-quality bonds once fetched yields of roughly 5 percent, more than double the current rate.

Conversely, the dividend yield of the S&P 500 Index is about 2.4 percent, which still compares quite favorably with the 1.1-percent yield of the total government bond market, including shorter-term Treasury notes.

The S&P yield has outpaced the yield of the government bond market on only a few occasions.

Dividend portfolios are appropriate for many investors, particularly those who tend to be more conservative, said J. Chris Cooke, managing director of investments at Cooke Financial Group in Indianapolis, a part of Wells Fargo Advisors.

“Let’s face it, we live on yield, especially if you’re retired,” he said. “If interest isn’t cutting it, then maybe dividends will.”

Woodley Farra’s new equity offering, aptly named the Dividend Portfolio, consists of 25 companies whose collective yield is producing a higher 4.5-percent return for investors, firm principals said.

Companies in the portfolio are in traditionally stable sectors such as energy and utilities, health care and telecommunications. The investments historically have been referred to as “widow-and-orphan” stocks because of their relatively low risk.

“They will vary in [stock] price; they just won’t vary as much as the general market,” Woodley said.

Many Woodley Farra clients began inquiring about ways to increase their income more than a year ago, long before the recent bottoming of 10-year Treasury yields, said George Farra, also a Woodley Farra principal.

Roughly half the companies listed on the S&P 500 have a higher dividend yield than the government bond market.

Though Woodley Farra introduced its equity portfolio just a month ago, the firm expects it to attract strong demand.

Juli Erhart-Graves, president and owner of Indianapolis-based Worley Erhart Graves Financial Advisors Inc., said Woodley Farra’s dividend portfolio likely will compete against scores of mutual funds featuring dividend-paying stocks.

Worley Erhart Graves is sticking to its bread and butter—mutual funds and exchange-traded funds. Even so, the bear market is prompting most investment firms to provide alternative options.

“We’re looking for the best house in a bad neighborhood,” she said. “It’s no fun.”

Columbus-based Kirr Marbach & Co. also explored offering a dividend portfolio, but decided against it based on the resources it has.

Still, Mark Foster, chief investment officer for Kirr Marbach, expects investors will be interested in dividend portfolios.

“If you look over time, with equity returns, dividends have played a role and should play a larger role with muted returns,” he said.

Whatever option an investor might choose, the most important factor is always risk, said Cooke at Cooke Financial Group.

“A CD may pay you near nothing, but your principal is guaranteed. A dividend may pay you a great deal more, but you’ve lost that guarantee,” he said.•
 

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