Receiving Regular Dividends Is One Way to Invest
By Saghir Aslam
Irvine, CA

 

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

Screen the market for yields over 3% that are well-backed by earnings and surprising number of big household names come up-Clorox, Sara Lee, Johnson & Johnson, Merck, Verizon Communications, British Petroleum and don't forget our good AT&T, Sampra energy and other great companies.

It's a good time to remember that high-excitement stocks often end up providing investors with high drama and high blood pressure instead.

More boring "value" stocks-established companies is more stable or "defensive" industries-have usually proven a better long-term investment. (Defensive industries include food and beverages, health care, personal care, household goods and even telecoms). And even if they make fewer profits for you on the way up, they lose a lot less on the way back down. This has been proven time and again. Believe me over the last few decades I have tried both roads. Remember turtle and hare story slow and steady wins the race.

Tempting for income investors. Right now top dividend stocks have extra appeal. That's because they offer a tempting alternative to cash or bonds for those who need income.

Many savers are trapped between short-term savings like bank accounts or CDs, paying virtually no interest at all, and longer-term bonds, which pay a little bit more-and leave you at the mercy of inflation.

Why own bonds when you can own defensives. Such stocks are cheap in absolute terms. The dividend yield of U.S. defensives now equals the yield on 10-year Treasurys. And the dividends and earnings of defensives grow very steadily, unlike the earnings stream for the over-all equity market.

Where should the dividend hunter look? And what should you avoid?

Watch out for a dividend that's too high, especially anything in or near the double digits. That's usually a red flag. It means the stock market expects the payout to be cut, or even-in the case of some smaller companies, such as mining stocks-that management is slowly winding down the business.

Investors in General Motors thought they had locked in a great double-digit dividend yield-before the payout, and the stock, went to zero. So, too, did investors in Washington Mutual. There are easier ways to make a living.

Check Out the Finances. In dividend stocks the first thing you should check with a stock is the company's balance sheet: Does it have big, or unknown, potential liabilities that could blow up the company's finances?

The second thing to check is the cash-flow statement. Is the company earning enough to keep paying dividends? How much of a cushion is there if business turns down?

A company that's actually raising payouts. If a company grows its dividend that is the best signal the management and the board can give that they have confidence in the future.

What should you look for: drug companies, seeing strong cash flow and solid balance sheets at the likes of Merck (MRK), Abbott Laboratories (ABT), and overseas firms Sanofi-Aventis ( American depositary receipts: SNY), Navartis (NVS) and AstraZeneca (AZN).

Also major consumer-product firms like Procter & Gamble (PG), PepsiCo (PEP), Colgate-Palmotive (CL) and McDonald's (MCD).

Technology stocks have boomed this year, but a few big companies still offer reasonable yields, including Analog Devices (ADI) and even Intel (INTC).

But some of the fattest yields are to be found in telecoms. Verizon (VZ) is very attractive. It has the best quality network and a 6%-plus yield. And there's possible upside if the network can offer customers an Apple Iphone next year, as some rumors suggest could happen.

I like overseas mobile giant Vodafone (VOD), and Spain's Telefonica (TEF), whose U.S-listed shares have a 4.7% yield. Telefonica has emerging-markets growth because Latin America now accounts for about half of its sales.

Pay Attention to Funds, Too

Picking individuals, stocks can be risky as well as time-consuming. Those looking for an easier life can look at "equity income" mutual funds. These invest in dividend stocks, and they will do the work and spread your bets for you.

One option: a low-cost ex-change traded fund like the iShares Dow Jones Select Dividend Index Fund (DVY), which currently has a 3.9% yield. Keeping your fees low is a sound principle in investing.

Another possibility: shares in a close-end fund that invests in dividend payers. Closed-end funds are mutual funds that trade on the market like stocks. You can sometimes, like now, buy them at a discount to their net assets. As I always so suggest take time. Do your homework before investing your hard earned money.

Advantaged Dividend Income Fund (EVT) is one. It has a payout rate of nearly 9%. It's trading for about 10% below the value of its investments, and has further goosed returns by borrowing money cheaply at short-term interest rates to buy more shares. Be aware that borrowing can increase volatility. Be careful.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)

 

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Editor: Akhtar M. Faruqui
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