Retirement is supposed to be about financial security, which explains why many senior citizens are leery of putting too much faith in an up-and-down stock market. But, safe investments, such as bank CDs and government bonds, hardly provide enough income to keep up with inflation.
That's why retirees are so attracted to dividend-paying stocks that provide a steady income as well as the potential for capital growth if the stock price appreciates.
While dividend stocks provide a stable stream of income regardless of whether a stock rises or falls in value on a day-to- day basis, if the company's profits slide and the stock price takes a major dip, its board of directors can slash the dividend or -- in a worse-case scenario that became more common during the recession - - eliminate the payout altogether.
Big name companies are paying dividends equal to and higher than the current interest rates on bank money markets, CDs and government bonds. Johnson & Johnson (
JNJ) is paying a dividend equal to 3.4 percent of its share price; H.J. Heinz Co. (
HNZ) is paying 3.7 percent; McDonald's (
MCD) pays out 3.2 percent; while communications giant AT&T (
T) pays a quarterly dividend equal to 6.7 percent; and Altria Group (
MO), which owns major cigarette and tobacco brands, pays a whopping 6.7 percent.
High yield dividend stock investing seems to be all the rage right now, as investors look to insulate themselves from share price depreciation via a guaranteed quarterly payday.
A few more companies are likely to pay out heavy dividends this year:
Armour Residential (ARR)
Real estate investment trusts or REITs are great dividend investments because they have to give back 90% of their income according to federal regulations. Often that means big profits come back to stock owners via dividends. ARR stock has slumped a whopping -18% year-to-date on this negativity. However, that didn't stop the company from a July 29 payment of 40 cents a share – even as the stock was trading for about $6.50 a share! Annualized, this $1.60 payout gives the stock a whopping 24% dividend yield based on current valuations.
Capital Product Partners L.P. (NASDAQ: CPLP)
CPLP is set to pay a dividend of 22.5 cents a share on August 13 – down from a payout of 41 cents a share in February, but still a significant portion of it's nearly $9 share price. Annualizing out the dividend to 90 cents a year gives you a +10% yield.
Resource Capital Corp. (NYSE: RSO)
It just paid a dividend of 25 cents a share on July 27, giving it an annual payout of $1 a share. Another nice sign for income investors is that dividends have been paid since 2006. To top it off, RSO has been riding hopes of a recovery in commercial real estate with improving earnings in the last two quarters and a very healthy +25% gain in share prices since January 1. A big dividend is great, but coupled with big stock increases those paydays are even better.
Whiting USA Trust (NYSE: WHX)
WHX just paid a dividend of 70.1 cents a share back in May and is due for another payday soon. With shares at just under $21, that gives this dividend stock a yield upwards of 13%.
MV Oil Trust (NYSE: MVO)
The company just paid a nice 96.5 cent dividend to shareholders on July 23, and has a record of payouts since 2007. Like the aforementioned Whiting Trust, MVO has also steadily increased its dividends recently – from 57.5 cents in January to 60.5 cents in April to the 96.5 payout most recently. That bodes well for future dividend growth.
Kohlberg Capital (NASDAQ: KCAP)
The company is up about 12.5% year to date, and just paid a 17 cent dividend per share on July 29. That's down from 24 cents a share as recently as October 2009, but still equals a nice 13% yield when annualized out.
Mesabi Trust (NYSE: MSB)
The company is scheduled to pay a heft 80 cent quarterly dividend on August 20 – up significantly from 12.5 cents paid out per share in May. Annualized, that dividend gives Mesabi Trust shares a nice 13.5% yield. But, investors who own the company have far more to cheer about than just this payday. MSB stock is up a stunning +84% year-to-day.
Dividend income, one of the few certainties in any market cycle, deserves a closer look and a strategic approach by investors as Congress decides how to deal with the expiring Bush administration tax cuts. Corporate cost cutting over the past few years, combined with reduced spending, has left many companies with huge piles of cash on the books. This usually bodes well for dividend investors. However, if it looks as if Congress will raise the tax rate on dividends, that cash might be directed toward either one-time special-dividend payments before taxes go up or stock repurchase programs.
A major part of the appeal of dividend-investing strategy, particularly in times of extreme market uncertainty and volatility, is that it helps investors take advantage of market declines. Dividend payments create automatic dollar cost averaging, and forces investors to buy low. While the political analysts and prognosticators carry on the tax debate, investors should align themselves with companies that have a proven history of dividend payments.
