NEW YORK — When Carol Levey got married, her father gave her some investment advice: Buy stock in safe, dependable companies — the kind that pay dividends.
Nearly eight years later, Levey wishes she had listened. Her portfolio, which contained mostly riskier tech shares, has crumbled as the market plunged over the past two years. Now Levey and her husband own Exxon Mobil, IBM, McDonald’s and Pfizer, all of which pay dividends to shareholders.
“It is a little bit of safety,” the Encino, Calif., woman said of dividends. “My parents provided for me, and they didn’t have all these high-flying stocks. They did it the old-fashioned way.”
During the bull market of the late 1990s, investors turned away from dividends. They were deemed passe in the new technology and dot-com era, when Wall Street’s most successful companies reinvested all their profits to maximize growth. But with a grueling bear market sending stocks to their lowest levels in years, the dividend is back in vogue, touted for giving investors a dependable source of income.
“It is a certainty in terms of what you are going to receive versus stock prices going up, because everyone believes prices can only fall,” said Joseph Keating, chief investment officer at AmSouth Asset Management in Birmingham, Ala.
With the market having lost about a quarter of its value over the past nine weeks, a 92-cent-per-share annual dividend from Exxon Mobil looks pretty good, representing a guaranteed cash return of $920 to investors who own 1,000 shares.
”(Investors) are looking for, as we say, a bird in the hand, and dividends represent that,” said Arnie Kaufman, editor of Standard & Poor’s newsletter “The Outlook.”
Low interest rates have also worked to make dividends fashionable again. The annual yield on a money market account is 1.8 percent, according to Bankrate.com. But the average yield on dividend-paying stocks in the S&P 500 index is 2.3 percent.
“Investors are saying, ‘I need a certain rate of income. I need additional income from the common stocks I own,”’ Keating said.
Stocks that pay dividends recently have also lived up to their reputation as safe — or at least safer — havens in terms of performance on Wall Street. So far this year, the 350 dividend-paying stocks in the S&P 500 have declined about 11 percent, less painful than the 29 percent drop among those that don’t pay dividends.
Financial advisers have long recommended investors include dividend-paying stocks in their portfolios and for a variety of reasons.
Dividends are more attractive during bear markets and particularly for investors who are retired and look to quarterly payments to supplement their income.
With dividends, “you have the ability to wait out the stock market decline and still have some income,” said Steve Wetzel, a professor of finance at New York University’s School of Continuing Education and a certified financial planner.
Another advantage to dividend-paying stocks is the opportunity for investors to reinvest the money. Rather than get a check, investors can use dividends to purchase additional shares.
Some companies have responded to renewed interest in the dividend by increasing their payments. Dividends of S&P 500 companies were up 4 percent during the first half of 2002 from the same period last year.
Procter & Gamble announced earlier this month it was raising its annual payment to $1.64 from $1.52 a share.
Other companies, such as Ashland Inc., are keeping their dividends steady but have noticed a greater interest in them.
“In recent months, I have had more questions about the dividend than I have had in my career,” said Paul Chellgren, chairman and 28-year veteran of Ashland Inc., an oil services and diversified chemicals company in Covington, Ky.
Ashland’s annual dividend is $1.10 a share. During the last bull market, Chellgren said investors and analysts were asking: “Why don’t you eliminate your dividend? It is not important any more.”
Indeed, back in the years of the bull, there was much less appreciation for companies that shared a portion of their profits with shareholders. The thinking was that if Microsoft didn’t pay dividends, then they were unnecessary, a throwback to an older generation that talked of safe bets rather than stellar returns.
“We just sort of got caught up with the excitement of tech stocks. We weren’t looking for dividends,” said Levey, the Encino, Calif., investor.
But investor Sanford Holstein said he’s been buying dividend-paying shares “because of how the market is. You don’t stand a chance.”
The retired shop owner in Syracuse, N.Y. said, “My strategy now is to protect as much as I can, and earn as much as I can.”