It's Time for a New Dividend Strategy

It may be time for investors to rethink their dividend strategy. Although stocks with juicy dividends (and funds focused on them) have been a great choice recently for investors frustrated by low bond yields—in some cases churning out payments yielding 4% or more and producing handsome capital gains—the good times may be nearing an end, financial professionals say. So much money has flowed into high-yielding stocks in recent years that it has made them expensive by historical market measures, they say. That means, at best, big dividend payers will probably underperform other areas of the equity market if stocks continue to rally. And in the event of a major market correction, they may provide less downside protection than usual, or even lose value.

The shifting landscape doesn't mean investors have to drop dividend-oriented funds from their portfolios altogether, experts say. But those on the hunt for yield may want to be more selective about the types of investments they make to reduce their risk. Here are a few ideas: 1. Avoid the highest-yielding stocks and funds. 2. Accept lower dividend yields from companies likely to raise their dividends over time. 3. Watch fund expenses, which are deducted before dividends are distributed. 4. Spread risk by getting dividends from different types of funds. 5. Use dividend stocks as just one source of portfolio income.

Source: Wall Street Journal

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