Five Ideas For Income Investors

6/15/2009


2009 has not been kind to investors in income stocks.

The average S&P 1500 Index stock is up 16% so far this year, but investors in high-yielding stocks are not fully participating in the fun. Stocks that yielded at least 4% at the end of 2008 have averaged a year-to-date return of 4%, while those that did not pay dividends returned an average of 29%.

Don’t count on better returns from high-yielders going forward, as S&P 1500 stocks with yields of more than 4% earn an average Quadrix® Overall score of just 47.

Against an economic backdrop so unfriendly to dividends, what is an income investor to do? Check out the following five income-investing tips for the second half.

Look in new places. The financial and utilities sectors, home to many of the highest-yielding stocks, have been among the worst performers so far this year, with shares of financials and utilities down an average of 7%. We find few appealing names in these sectors. The table below lists five of our favorite high-yielding stocks.

TOP INCOME STOCKS
5-Yr.
Ann.
Div.
Gro.
(%)
— Quadrix Scores * —
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
Quality
Fin'l
Str.
Overall
Sector
Aflac ($34; AFL)
1.12
3.3
26
24
77
92
93
Financials
AstraZeneca
($41; AZN) e
2.05
5.0
38
13
95
79
98
Health
Care
General Dynamics
($59; GD)
1.52
2.6
24
17
90
75
96
Industrials
Johnson & Johnson
($56; JNJ)
1.96
3.5
43
12
86
93
81
Health
Care
United Technologies
($56; UTX)
1.54
2.7
33
17
86
64
77
Industrials
* Quadrix scores are percentile ranks, with 100 the best.     
e Dividend and yield estimated.
 
TOP 5 BOND FUNDS
Est.
Fund (Price; Ticker)
Div.
($)
Yield
(%)
12-Mo.
Return
(%)
Category
Vanguard GNMA ($11; VFIIX)
0.45
4.3
7.8
Interm. Gov’t
Vanguard Interm.-Term Tax-Ex. ($13; VWITX)
0.43
3.3
3.0
Muni Nat’l Interm.
Vanguard Total Bond Mkt. Index ($10; VBMFX)
0.40
4.0
4.4
Interm.-Term Bond
Vanguard Wellesley Income
($18; VWINX)
0.85
4.6
(6.7)
Stock/Bond Blend
Wells Fargo Advantage High Inc. ($6; STHYX)
0.50
7.8
(4.0)
High-Yield Bond

Don’t expect a quick change in sentiment. In recent months, the dividend picture has dimmed. According to Standard & Poor’s, 367 companies cut their dividends in the March quarter, the most reductions in at least 54 years. Total dividend payments declined by $77 billion in the quarter from year-earlier levels. Many financially strong companies continue to raise the payout, but further cuts are possible, particularly if the economy doesn’t recover strongly heading into 2010.

S&P 1500 BREAKDOWN
Below are equal-weighted averages grouped by sector and dividend yield.
Div.
Quad
Sector
Yield Range
End of
2008
(%)
Current
(%)
YTD
Total
Return
(%)
Quality
Fin'l
Str.
Overall
Consumer Discretionary
1.8
1.2
37
53
53
57
Consumer Staples
2.2
2.1
15
65
57
66
Energy
1.3
1.0
31
70
66
66
Financials
4.4
4.3
(7)
46
51
43
Health Care
0.5
0.5
7
71
64
73
Industrials
1.8
1.7
5
65
60
59
Materials
2.8
2.2
27
55
50
51
Technology
0.7
0.5
33
53
58
51
Telecommunications
6.5
4.8
17
60
60
67
Utilities
4.4
4.9
(7)
55
50
62
Yield above 4% 
6.8
6.0
4
46
49
47
Yield above 2% 
4.8
4.3
7
55
55
53
Yield above 0% 
3.7
3.4
7
58
58
56
0% yield
0.0
0.0
29
57
55
58
S&P 1500 Index
2.1
1.9
16
57
57
57
* Quadrix scores are percentile ranks, with 100 the best.

Make the most of your cash. The Forecasts recommends investors keep the cash portion of their equity portfolios in Vanguard Short-Term Investment-Grade ($10.12; VFSTX), a relatively low-risk bond fund. Even short-term bonds can change in value, so the fund’s price will fluctuate. But in general, the movements are not sharp. And the fund yields 3.9%, well above the return on cash.

Revisit your bond holdings. The events of the last year have illustrated the importance of portfolio diversification better than any words printed here could. Most investors should hold at least some of their portfolio in fixed-income securities — we recommend bond mutual funds. The nearby table lists our top five bond funds, each of which taps into a different sector of the fixed-income market. For more information on these and other funds we recommend, go to page 6.

Make your own income. High dividend yields may look tempting, but even investors who need income from their stock portfolios should not purchase stocks just because they pay a big dividend. Instead, construct a diversified portfolio of quality stocks, even if the yield is less than you would prefer. You can always sell some of the stocks periodically if you need the cash.


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