Investment Focus - Dividend Paying Stocks

As we move money back into the stock market, one area of focus will be large cap, dividend paying stocks. Here are some reasons for using this approach:

Dividends are a large part of stock market returns. Over the past 100 years, dividend accounted for about 40% of the stock market returns. With the market in a trading range, I expect that dividends will account for over 40% of returns in the near term.

Dividends can mitigate losses during a market decline. Higher dividend, quality stocks may fall less when the stock market declines since the share holder will receive a quarterly payment of holding the stock. As the stock price falls, the dividend yield rises. With higher yields, more investors buy the stock which slows the decline of stock price.

Dividends may be federally tax free. For those in the 15% tax bracket, dividends are exempt from federal taxes in 2010. This tax break may be extended with other Bush tax cuts due to expire at the end of 2010. For tax brackets above 15%, the tax rate for dividends is only 15% in 2010.

For now, we are considering stocks with dividend yields in the 2.5% to 7% range. In addition, we are not buying securities which are limited partnerships due to the tax complexity of owning the shares.

Stocks we are considering include the following companies: Intel (INTC), Phillip Morris (PM), Boeing (BA) and Johnson & Johnson (JNJ). I have already purchased and sold Verizon (VZ) and Altria (MO) which I may buy back if the market declines.

Disclosures: At time of publication, we own Intel and Phillip Morris in our trading accounts and Boeing in our managed accounts.

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This is not financial advice. Please consult a professional advisor.

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