Navigating the dividend dilemma

Wed Apr 25, 2012 12:57pm EDT
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By Chris Taylor

NEW YORK (Reuters) - Once the domain of grandmothers waiting for a quarterly check from their local utility, dividends have become very appealing in the wake of a choppy decade for stock markets.

Dividend-paying stocks reward investors whether the market goes up or down, a fact which boosted their popularity in 2011. Equity-income funds were the top diversified equity performers in 2011, up almost three percent for the year, according to fund research firm Lipper, a Thomson Reuters company.

But that popularity, ironically, could also be a problem.

"Dividend stocks have had a great run," says Charlie Dreifus, senior portfolio manager of New York City-based The Royce Funds. "Has it become a crowded and overvalued space? Maybe."

Companies jumping on the dividend bandwagon include Apple Inc (AAPL.O: Quote), which, after years of rebuffing income-hungry shareholders, said recently it will award a quarterly dividend of $2.65 per share beginning in July.

Goldman Sachs Group Inc (GS.N: Quote) recently hiked its dividend for the first time in six years, by almost a third, making for a yield of roughly 1.6 percent.

Other dividend stalwarts offer even higher yields - like Merck (MRK.N: Quote) at 4.3 percent; Kraft Foods Inc KFT.N, at 3 percent; and Boeing Co (BA.N: Quote) at 2.4 percent.

The average yield of companies in the S&P 500 is around 2 percent, so you can own a broad index of equities and skim off as much income as you'd get from 10-year T-bills.   Continued...

Traders work on the floor of the New York Stock Exchange, August 4, 2011. REUTERS/Brendan McDermid