The Best Place to Find Income Now

Most income investors are used to seeing their cash-producing investments as a hedge against a falling stock market. But when stocks drop, the yields from dividend-paying stocks go up. And with bond yields falling like a rock, dividend stocks are looking more and more attractive to income-seeking investors.

A tale of two markets
Over the past month or so, we've seen some rocky times in the financial markets. On one hand, stocks have fallen sharply, with the S&P down more than 10% from its April highs.

What hasn't been reported so widely, however, is the nearly opposite reaction that the U.S. bond market has had to all the current troubles around the world. While European sovereign debt problems have called into question the viability of the euro as a currency, Treasury bonds have seen their prices soar and their yields plummet. Just since early April, the yield on the 10-year Treasury has fallen from nearly 4% to just 3.15% yesterday. The 30-year yield has gone from 4.85% to just over 4.05%.

These are huge moves for the bond market, especially when you consider that small changes in yield on long-dated Treasuries translate to significant price moves. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) has risen by more than 10% since mid-April. That's good news for those who already had their money invested in Treasury bonds.

Where to invest now
But if you have money to invest now, you won't benefit from those capital gains on bonds. Rather, you'll be locking yourself into bonds at lower yields.

In contrast, though, hard-hit dividend stocks have seen their yields increase substantially in the past several weeks. I searched for stocks with yields of 3% or more whose shares had dropped by at least 10% in the past month. Here are some of the results:

Stock

Current Yield

Yield on April 23

National Grid (NYSE: NGG  )

7.1%

5.7%

Southern Copper (NYSE: SCCO  )

6.5%

5.5%*

Telefonos de Mexico (NYSE: TMX  )

5.2%

4.3%

Spectra Energy (NYSE: SE  )

5.2%

4.3%

Chevron (NYSE: CVX  )

4%

3.3%*

Source: Yahoo! Finance.
*Change in dividend since April 23.

As you can see, at the same time bond yields were dropping by nearly a full percentage point, the yields on some high-paying dividend stocks were going up by a similar amount. Some stocks saw their yields rise even more.

That makes dividend stocks attractive even when you look only at their current yields. But the other upside to dividend stocks is potentially much more important to your long-term investing success: If you choose the right stocks, you'll often see your payouts increase over time. With bonds, when it comes to how much interest you'll collect, what you see is what you'll get from now until the bonds mature. But good stocks raise their dividends regularly. For instance, shares of Clorox (NYSE: CLX  ) have lost 3% of their value in the past month. But with a 10% dividend increase, their yield has gone up from 3.1% to 3.5%. Similarly, with Nordstrom's (NYSE: JWN  ) stock having fallen by more than 16%, its 25% dividend increase last week pushed its yield up from 1.4% to 2.1%.

Beware of risk
Now, before you start chasing for yield, you have to realize that investing in dividend stocks is far riskier than buying Treasuries when it comes to the potential to lose money. Treasuries are backed by the U.S. government, while dividend stocks are backed only by their own earnings. If the economy starts to go back into a tailspin, you could easily see dividend stocks replay some of their horror stories from 2008.

But if you think the recent correction in the stock market may be overblown, then it's a good time to start looking at dividend stocks as a way to bolster your income. With bond yields in the basement, generating the income you need is essential to your financial health.

To pay dividends, companies have to have the money to pay you. Nick Kapur has found seven stocks that are swimming in cash.

Fool contributor Dan Caplinger is always looking for income. He doesn't own shares of the companies mentioned in this article. Clorox, National Grid, and Spectra Energy are Motley Fool Income Investor recommendations. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy is the best place to see it all.


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  • Report this Comment On May 26, 2010, at 3:43 PM, masterN17 wrote:

    To play the part of the Devil, BP's dividend looks particularly attractive, if one is willing to consider the company's future after their oil well crisis.

    - N

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