Dividend stocks as bond substitute

Corporations have several clear ways to spend their cash: invest in the business, make acquisitions, buy back shares or pay shareholders a dividend. Lately, with bond yields so low and market volatility high, dividend-paying companies are getting plenty of attention. Dividend-centric portfolios have held their own as well. Equity-income mutual funds have a bias towards dividends; the category lost 2.3% on average for the year through July 8, about one percentage point better than S&P 500 index funds, according to fund-tracker Lipper Inc

Dividend income can cushion market shocks, and many well-known stocks now offer payouts of more than 3% -- better than a 10-year Treasury. Your focus should be on companies with a lengthy history of increasing dividends, reflecting a sound business, rather than on stocks with the highest absolute yield, which could spell trouble. "As we expect the stock market performance to continue to exhibit heightened volatility for the rest of 2010, we favor dividend growers and high dividend payers," Brian Belski, chief investment strategist at Oppenheimer Asset Management, wrote in a recent research report.

Source: MarketWatch

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