Dividend Investors: Don't Panic

 | Jun 11, 2013 | 11:00 AM EDT
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A spike in 10-year Treasury yields has underpinned a widespread drop in bonds. Bond equivalent stocks, the kind that pay high dividends, have been collateral damage. Many dividend investors have no doubt been hurt by the rate spike and are now moving toward the exits. But that's a mistake.

Sure, fear of an end to the 30-year-plus bull market in bonds is justified, but dividend investors shouldn't panic. Higher rates aren't something to be afraid of. If the Federal Reserve has any say in the matter, higher rates will be accompanied by a stronger economy. Ultimately, that is good for both earnings and dividends. And for once, savers will be rewarded instead of punished for their thrifty ways.

It is true that some of the dividend stocks we've accumulated are taking hits, but aren't most of us retail investors supposed to be in this for the long run, anyway? If so, see this for what it is: A chance to own more of our favorite stocks at a higher yield.

As I have suggested, find companies whose dividend hikes can outpace or match inflation. That's something bonds can't do. While looking, cast a wide net and don't forget cyclicals. Air Products (APD) and 3M (MMM) fit the bill: Both have strong balance sheets. Air Products last raised its dividend a whopping 14% and 3M raised its 7%.

Take a dip into AT&T (T). Its 5%-plus yield is bolstered by an accretive buyback, which is reducing share count and freeing up cash flow. AT&T's revenue is once again growing and dividend growth, while modest, should at least match CPI inflation. And don't forget old tech, either. Cisco (CSCO) can grow its dividend in the high single-digits and still trades at only 13.6x earnings. Unlike some of the old tech names, Cisco is still very much a dominant player in its field.

Pipeline master limited partnerships (MLPs) are still a little rich, but real estate investment trusts (REITs) have been savaged by this decline. I recently recommended two in this sector, but here is one more with growth and dividend momentum: Tanger Factory Outlets (SKT). Tanger's yield may seem low at only 2.5%, but the company recently raised the dividend by 7% and it has the momentum to continue. Adjusted funds from operations (FFO) have increased by double digits in each of the last three years with same-store sales growth consistently in the mid-single digits. Tanger has an incredible brand name behind it and a very long growth story ahead of it. The stock is off 10%.

Successful dividend investing right now requires widening the net and thinking outside the box. What we used to buy won't work going forward. Utilities are too close to bonds and, therefore, too risky right now. We have to focus on growth. Branded consumer packaged staples are expensive, as are the pipeline MLPs. All three could still come down some more. That doesn't mean we should rush for the exits, though. The contrarian call to pick up dividend payers is a compelling one. Stick with growth names and don't fear the cyclicals.

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