This article was published in the November issue of Money magazine.
You may be tempted to declare the great run in dividend-paying stocks over. Investors, after all, are already shifting focus away from stodgy, high-yielding defensive stocks such as utilities and embracing risk again -- as often happens when bull markets age.
Yet "the dividend story still has legs," says Stephen Auth, chief investment officer at Federated Investors. Contrary to popular belief, plenty of stocks deliver steady income and double-digit earnings growth -- and they also happen to trade at attractive prices. The trick now, says Rick Platte, co-manager of the Ave Maria Rising Dividend Fund, is "to put more emphasis on growth."
A good place to start is with technology companies, which only recently began paying dividends but have quickly become the biggest contributors to S&P 500 payouts. A top tech pick in Platte's fund is Intel (INTC), the dominant maker of semiconductors for PCs. Intel yields nearly twice what the S&P 500 does. While there are concerns that Intel's growth is slowing along with PC sales, those worries are overblown. Analysts expect Intel's profits to rise 12% annually for the next five years, in part because of fast growth in the mobile market, which increasingly relies on Intel's servers and chips.
Another of Platte's tech holdings is Microchip Technology (MCHP), which makes memory chips and other processors used in autos and basic home appliances. Not quite cutting edge, but it allows the firm's profits to grow about 10% a year. That, in turn, lets Microchip, which yields 3.5%, keep increasing payouts. It has boosted them 38 times since 2003.
You'd be wise to look abroad for income opportunities, since U.S. stocks have rallied so much this year, says Russ Koesterich, BlackRock's chief investment strategist. He recommends focusing on Europe and Japan.
I ran a screen to find foreign firms that yield more than a 10-year Treasury and offer growth at a fair price. Among the stocks that popped up: the Japanese camera and photocopier maker Canon (CAJ), which yields 4.1%. The company's profits are expected to climb 12% annually, thanks in part to recent strength in its office-equipment unit. Lately this story has been overshadowed by fears over weak digital camera sales. But Morningstar analyst Carr Lanphier says "the recent pullback in share price could be an attractive opportunity for investors."
Britain's HSBC (HBC) also passed this screen. The bank derives more than half its revenues from Asia and Latin America, with less than a third coming from Europe. Now that the continent is out of recession, though, HSBC should enjoy another shot of growth. Indeed, profits are forecast to rise nearly 13% a year.
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