Things dividend investors need to know

Thinking small paid off big last year. Funds specializing in stocks of smaller companies gained an average of 23 percent compared with 13.6 percent for large-cap funds, according to Lipper Inc. But avoiding those big stocks could mean missing out on one of 2011's best opportunities: There's growing potential in dividends, and they're more likely to be paid by larger companies. That's because smaller companies generally reinvest profits in expanding their business. There are a couple reasons why dividend investing is likely to pay off this year:

An extension of the Bush-era tax cuts, approved by Congress in December, means Uncle Sam will continue treating dividend income favorably.  And corporate America is sitting on piles of cash. During an economic recovery, corporations will be more inclined to raise their dividend payouts. "Traditional dividend investing is back in style as investors look for total return, stability, and income," said Howard Silverblatt, a Standard & Poor's analyst. "2010 was a very good turnaround year." Yet there's still a lot of ground to make up before dividend payouts reach their prerecession levels. Dividends are important because historically they make up more than 40 percent of the total return of the Standard & Poor's 500 index, with the rest coming from rising stock prices.

Source: Philly.com 

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