The Dividend-Stock Comeback

 | Mar 02, 2012 | 9:30 AM EST  | Comments
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Fashions tend to repeat themselves. 1980s music has come back, as have 1970s-style clothes -- and, of course, we'll always appreciate comfort food from our childhoods. So it seemed inevitable that an out-of-favor investment strategy would make a comeback. The one I have in mind involves investing in dividend-paying stocks. For years these were ignored as the market shot upward the 1980s and 1990s, but the malaise in the past decade has brought a newfound appreciation for stocks that pay investors cash every quarter.

As the Los Angeles Times recently reported, investment strategists at such major firms as BlackRock (BLK), Pimco and Wells Fargo (WFC) have been "tripping over one another to highlight dividends' appeal for the last year."

Adding to the allure of dividends is that a number of companies have been boosting their payouts --including, the Times reports, at Amgen (AMGN), Starbucks (SBUX), Disney (DIS) and Microsoft (MSFT), each of which increased their payouts by 25% or more in 2011. Further, Apple (AAPL), which is sitting on about $100 billion in cash, is widely expected to establish a payout sooner rather than later.

The appeal of dividends is they are a practically guaranteed income stream at a time when stock-price appreciation is hard to rely on. In addition, payouts are often increased over time. The Times gives Caterpillar (CAT) as an example. Five years ago, an investor who owned 300 shares of this equipment maker earned $360 in annual dividends, while today those same shares produce $552 in payouts.

There is a list called the S&P Dividend Aristocrats, which comprises stocks that have paid a dividend every year for a minimum of 25 years and have raised their dividend each year for that same time period. As longtime readers will know, on a general basis I choose stocks using computerized strategies that I based on the writings of great investors -- and I screened all these "Dividend Aristocrats" to find which earn high grades from any of my strategies.

Four managed to do so, and I've actually written recently about some of them. In any case, given their status as solid dividend stocks, on top of the high marks they've earned on my strategies, these companies all have a lot going for them.

Ecolab (ECL) is a favorite of my Warren Buffett-based strategy. This global leader in the cleaning and sanitation industry gets high grades from that strategy because of its size, earnings-per-share increases in nine of the past 10 years, a moderate debt load, a return on equity of 21.1% when averaged over the past 10 years and an expected annual rate of return to investors over the next 10 years of 12.3%. The stock's yield is 1.3%.

AT&T (T), the telecom giant, gets the nod from my James P. O'Shaughnessy strategy. In the company's favor: large market capitalization ($180 billion), strong cash flow per share, plenty of shares outstanding and huge trailing 12-month sales ($127 billion). Per the strategy, companies that pass these four tests are then ordered by dividend yield, and the top 50 companies are ultimately selected. AT&T is in the top 50 with a yield of 5.80%.

The remaining two stocks are also O'Shaughnessy favorites. One is Abbott Laboratories (ABT), a major pharmaceutical, medical devices, eye care and nutritional health-care-products company. The company's market cap of $89 billion, strong cash flow, high number of shares outstanding and large sales of $39 billion, all place it in the strategy's favor. It also earns a berth among the top 50 with a yield of 3.60%.

Another healthcare company is the final pick -- Johnson & Johnson (JNJ), considered the world's largest healthcare company. What it has going for it: a huge market cap ($177 billion), strong cash flow per share, lots of shares outstanding and $65 billion in annual sales. Plus, its dividend yield is a nice 3.54%, which puts it in the elite 50.

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