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One Investment to Avoid in Today's Market
Dividend-paying stocks are compelling to investors for many reasons. Not only do they tend to be less volatile as a group and provide a real cash return right away, but they can also reflect management's long-range visibility on profits and show its commitment to partnering with shareholders.
As we're all now well aware, the dividend landscape has dramatically changed. The past 14 months have been the worst stretch for dividend investors in modern history. Sixty-two S&P 500 companies slashed their payouts some $40.6 billion in 2008 alone.
Another $16.6 billion in dividend cuts -- a record -- already came in the first 50 days of 2009, including cuts from traditional stalwarts like Pfizer (NYSE: PFE) and Dow Chemical (NYSE: DOW). Standard and Poor's expects S&P 500 dividends to decline some 13.3% this year -- the worst decline since 1942.
Needless to say, these massive dividend cuts have adversely affected. As of Jan. 31, none of the six domestic dividend ETFs had outperformed the S&P 500 since their respective inception dates.
Handcuffed
Under normal circumstances, that sounds like a nice way to generate extra dividend income and stack your bets behind strong companies. This year, though, has been anything but normal. It's been the higher-yielding stocks whose dividends have been under the most pressure.
A better way
With dividends being slashed left and right in this market, selectivity is essential and mechanical strategies like this one are left at a major disadvantage. Among other things, savvy dividend investors will want to look for companies with solid balance sheets, a history of increasing dividend payouts, and plenty of free cash flow to cover the payments.