Be Smart About Dividends

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Dividends can be powerful contributors to your wealth. Over time, a huge portion of the stock market's gains comes not from price appreciation but from the dividends that companies pay out.

It seems obvious, then, that we should pay attention to dividends and seek them out for our investments. Indeed, some think, quite reasonably, that this is a great time to double down on dividends. 

But be careful with your dividend-seeking dollars. There are some cautionary dividend tales currently in the news that you should take note of, such as:

• Macy's (NYSE: M) recently cut its dividend. When I first heard of this, though, all I heard was that it cut its dividend "by 8 cents." That doesn't sound like much at first, but when you look closely, you'll see that it was cut to $0.05, from $0.135. That's a 63% drop -- a big deal.
• Meanwhile, Newell Rubbermaid (NYSE: NWL) recently halved its dividend. The fact that the news didn't send shares reeling suggests that investors were expecting such a cut. Sometimes you can see these coming, such as when payout ratios get too high. The company will now be paying $0.40 a share annually in dividends, and can divert the rest of the money it was spending on dividends toward paying off its debts.
• Plenty of struggling companies, meanwhile, are insisting that their dividends are safe. Be careful anyway. Management at Bank of America (NYSE: BAC) had originally resisted the idea of a dividend cut, but then went ahead and did it anyway. Dow Chemical (NYSE: DOW) is considering a cut now, after assuring investors last year that it was unlikely. Kodak (NYSE: EK) is not planning a cut, nor is General Electric (NYSE: GE), but investors might want to keep an eye on them anyway.

Fortunately, there are lots of companies increasing, not slashing, their dividends. (Here are some examples of great hikers.) Focus on healthy, growing companies and you can prosper.

Meanwhile, if you're looking for some dividend-paying candidates for your portfolio, a free, no-obligation trial of our Income Investor service will give you dozens of researched recommendations, many yielding 8% or more.