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Dividends Look Good Today

- Alan Lavine and Gail Liberman

Look to stocks that pay dividends. We’ve been rocked by so many accounting scandals that today it may be better to invest in companies that pass on their profits to their shareholders in the form of dividends.

Investors are hurting from plunging stock prices due to accounting scandals. Every day there seems to be another company that’s misreported earnings. So far the list included Enron, Adelphia Cable, Quest Communications, Xerox, Tyco, WorldCom and most recently Merck. Experts say there could be more to come.

Why not get those corporate profits up front than deal with growth companies that reinvest profits into the company and produce ficticious profits?

Edwin D. Everett, analyst with David L. Babson & Company, Cambridge, says dividends mean the company is paying close attention to their finances.

"Dividends mean discipline," says Everett." Cash dividends force discipline on companies, says Everett. " (Dividend) payment hikes come more slowly, but when it comes investors can be sure management has thought the decision through and is serving only shareholders interest in returning cold hard cash."

In addition to sharing in corporate profits, dividends paying stocks are less volatile than growth stocks that do not pay dividends. This year through June of 2002 the 351 stocks in the S&P 500 that pay dividends are up on average nearly 2 percent. By contrast, the 176 nondividend paying stocks of the S&P 500 are down almost 18 percent.

Financial research also shows that companies that initiate or raise dividend tend to perform well in the future. Cornell University Finance Professor Roni Michaely found that companies that initiate or raised dividends outperform nondividend paying company stocks by 7 percent in the following three years.

There are a fistful of mutual funds with excellent long-term track records that invests in dividend paying stocks. They include American Funds Washington Mutual, Franklin Equity Income, Gabelli Equity Income, Pioneer Equity Income, T.Rowe Price Dividend Growth, T. Rowe Price Equity Income, Fidelity Equity Income Fund and Vanguard Equity Income.

All these funds own large company stocks that are steadily growing earnings at 10 to 15 percent annually and yield over 2 percent.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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