If you like real money better than paper gains that can evaporate at a moment's notice, then dividend-paying stocks probably appeal to you quite a bit. And with the uptick in dividends over the past year, many investors are more optimistic than ever about the prospects for dividend-paying stocks.
But before you jump in whole-hog for the benefits of dividend payers, keep one thing in mind: As promising as the future outlook may appear, dividends are still playing catch-up, attempting to make up for losses from the financial crisis that utterly decimated some income-producing stocks.
A big bounce, but still falling short
The dividend stock universe has made quite a comeback from the dark days of the market meltdown. Research from Standard and Poor's shows that among the members of the S&P 500 index, more than half (255) increased their dividends during 2010, compared with just four companies that cut their payouts this year. That's quite an improvement from 2009, when 78 companies reduced their payouts versus just 157 increases.
S&P sees that trend continuing into 2011, projecting that two-thirds of all dividend-paying stocks in the S&P 500 will again raise their payouts next year.
But the news isn't all good on the dividend front. Despite recovering payouts, the total value of dividends paid is well below its peak value. This year, according to S&P's Howard Silverblatt, dividends will be up nearly 9% -- but that leaves them still down more than 18% from 2008's levels.
Slow going on the road back
The problem comes from the many companies that had to slash their dividends severely during the financial crisis. Many of the same companies that faced dividend cuts in recent years have subsequently seen vast improvements in their finances, and they've raised their dividends in response. But even after those increases, many still haven't returned dividend payments to anywhere near their pre-crisis levels. As examples, all of these companies have raised their dividends in the past year, yet those payouts remain well short of 2007 levels:
Current Annualized Dividend Per Share (DPS)
Annualized DPS, 1 Year Ago
Annualized DPS, 3 Years Ago
Source: Capital IQ, a division of Standard and Poor's.
These numbers show just how essential it is to put dividend increase announcements in context. Hearing that International Paper increased its dividends fivefold sounds very impressive -- until you realize that even after the increase, the dividend is only half of what it was three years ago. Similarly, even the dividend doubles that Comerica and Legg Mason have seen only get the companies a fraction of the way back to their pre-crisis dividend levels.
In particular, General Electric is responsible for much of the downturn in overall dividend payments. As one of the largest dividend payers in the stock market, GE's dividend cut in 2009 was devastating to the total dollar value of S&P 500 dividends. Pfizer also played a key role when it cut its dividend in half following its buyout of Wyeth.
Still more recovering dividend payers are likely to come onto the scene in 2011, as speculation increases about when banks and other financial institutions may start restoring their payouts to shareholders. Bank stocks may well see pops when they start having respectable dividend yields again.
But if you're serious about dividend investing, you might be better served by companies that never cut their payouts at all. Dozens of companies got through the financial crisis while maintaining long streaks of steadily increasing dividends. Although past streaks don't ensure future success, speculating on a comeback may well be a higher-risk strategy than simply buying tried-and-true dividend payers.
Don't be deceived
With dividend investing as popular as it is right now, everyone's trying to hype positive dividend news as important for investors. But be sure to look at the whole picture. By doing so, you'll invest without any gaps in your knowledge -- gaps that could lead to nasty surprises down the road if you're not careful.
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