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July 19, 2013
The Dispatch/Maryland Coast Dispatch
Page 73
MONEY SENSE
A Way To Find Gross And Yield
OCEAN CITY – With interest creased its payout by 15 percent rates hovering around their histori- each year for five years, the divical lows, many investors in recent dend yield on your original investyears have been looking beyond ment would double to 6 percent. Treasuries and other high-quality Today, with average dividend paybonds to dividend-paying stocks. out ratios well below the historical But not all dividend-paying stocks average, "companies have the are created equal. And in today's potential ability to deliver this type of markets, you might consider focus- dividend growth," Subramanian ing on companies that are increas- says. ing their dividends. According to As always, it's important to work Savita Subramanian, head of U.S. with your Merrill Lynch Financial AdEquity and Quantitative visor to help make sure Strategy at BofA Merrill your investment choices Lynch Global Research, are suitable to your needs these stocks have proved and in line with your tolerto be resilient during the ance for risk, your longvolatility of the past several term goals and your liquidyears. ity needs. While SubDividends were once asramanian notes that insociated with mature comcome from dividend-paying panies whose growth years stocks may provide some were behind them. Today, downside protection – BRIAN SELZER however, increasing numwhich could cushion the bers of growth-oriented companies, blow when stock prices fall – she alincluding technology and service so notes that they come with risks. firms, have started to pay dividends. "Dividends are not a guarantee The current yields from those pay- that you won't lose money," she points ments are often lower than the out. "But compared with focusing yields investors could get from more solely on capital appreciation, diviestablished stocks, but Subraman- dend-paying stocks may offer a deian says that in terms of total return fensive strategy for investors." potential, these younger companies – Brian Selzer might be able to outpace their more Special To The Dispatch mature counterparts over the long (A Merrill Lynch Wealth Manageterm. ment Advisor who can be reached at "We've found that companies 410-213-8520.) with lower current yields but growing dividends have historically outperformed higher-yielding stocks," she says. And dividend-growing stocks are currently inexpensive compared with high-yielding dividend stocks. Subramanian and her team of analysts have identified four criteria that, taken together, may signal that a company's dividend could be secure and likely to grow. "You don't want a company that has seen earnings jump around," Subramanian says. Wide swings may indicate that its profits – and the dividends that are paid out of those earnings – could be threatened during an economic downturn. Payout ratios are the proportion of the profits that a company is currently distributing to shareholders. The advantage here goes to companies that are giving shareholders a lower percentage. "If a company is already paying out 90 percent of its earnings, there is no room for its dividend to go up," Subramanian notes. Instead, look for companies with dividends closer to 30 percent of earnings. The lower this ratio, the more likely it is that the company will continue paying dividends. When the cost of financing rises, as it did during the credit crisis of 2008, highly leveraged companies could be forced to cut dividends and redirect those earnings to debt payments. In 2008 and 2009, more than 100 companies in the S&P 500 reduced their dividends. To see how powerful such a record can be, suppose you bought a stock when its dividend yield was 3 percent. If the company then in-
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