Singing the praises of dividend strategies

Carol Lippman of A.G. Edwards & Sons Inc. had been preaching the power of stocks with high dividends for almost a decade before the recent tax cut on dividends.

And she has the proof to back it up. Ms. Lippman’s model portfolio, which brokers for St. Louis-based A.G Edwards sell to clients as a unit investment trust, has handily beaten the Standard & Poor’s 500 stock index this year as well as over the past three and five years.

Ms. Lippman says she’s determined to spread the gospel of rising dividends as a strategy for investors during the current stormy market.

“A lack of trust is plaguing the stock market,” she says. “Why should investors give the stock market their money when they can’t trust corporate executives and auditors?”

Ms. Lippman, vice president, portfolio strategist and securities analyst, isn’t alone when it comes to singing the praises of stocks that yield high dividends.

James W. Paulsen, the Minneapolis-based chief investment officer with Wells Capital Management Inc. of San Francisco, is a firm believer in stocks that pay shareholders.

While he agrees over the long term with Ms. Lippman’s strategy of owning stocks that pay a dividend, Mr. Paulsen plays down the short-term benefit.

Over the three years of the down market, stocks that issue dividends have outperformed. “But if the market rallies, those stocks may not benefit,” he says.

“If the market pops back to optimism, [that strategy] doesn’t work in the near term,” he says.

tax-cut fallout

Mr. Paulsen says he likes sectors such as technology – where large-cap stocks would benefit from a pickup in business spending – as well as the S&P industrials and basic materials, which would gain from a weaker dollar.

Still, he says last month’s tax cut on dividends for shareholders could be an incentive to increase dividends or put them in place.

Ms. Lippman has a clear strategy when it comes to buying stocks with high dividends. As proof, she points to the returns of her portfolio, called the diversified stock income plan (see chart).

The focus is on companies that can increase the dividend on their stock year after year, she says. Over the past 10 years, she has followed 262 companies in eight sectors, as well as real estate investment trusts.

At the moment, about 100 companies make up her universe.

And 42 of those have already raised their dividend since Jan. 1, hitting high single-digit or double-digit rates. “That’s pretty good with low single-digit inflation,” she says.

Ms. Lippman has two styles, each emphasizing dividend yields and earnings growth to a different degree.

She says an investor should have 25 or so companies in a basket across the sectors. Such a basket with a 3% yield is currently about 0.6 percentage points over Treasury bonds. That basket of stocks is also forecast to have about 10% growth in earnings.

Another strategy has a dividend yield of 1%; that basket’s earnings are forecast to grow 12% to 14%.

While reluctant to give away the names of her top picks, Ms. Lippman points to Johnson & Johnson of New Brunswick, N.J., Sara Lee Corp. of Chicago and BP PLC of London as companies in her investing universe.

Pointing to Sara Lee, Ms. Lippman says its dividend could grow 6% a year, with an earnings growth of 10%. The company makes a wide array of name-brand foods, beverages and other consumer staples.

“The economy has to get pretty tough for people not to buy low-priced necessities of life,” she says.