After years of watching dividend yields shrink, investors are beginning to see more companies either introducing or increasing dividend payments.
The reasoning behind this is simple: Investors have increased their preference for dividends.
A recent survey by Eaton Vance showed that "Among individual investors polled, a clear majority (57%) said they prefer quarterly dividends over stock buybacks (23%) or special dividends (8%)."
The increased demand for dividends, according to the survey, is a "significant shift" from the 1990s, when investors preferred stock buybacks, which fueled EPS growth for many of the favored stocks of the day.
Perhaps greater board oversight following Sarbanes-Oxley, or the reduced dividend tax rates introduced by the 2003 tax reforms, have something to do with the renewed interest in dividends. But, in any case, dividends are back in the spotlight.
It was a very good year
The Eaton Vance survey also noted that "63.2% of S&P 500 companies increased or initiated a dividend during 2005." Included in this group is Applied Materials
Moreover, the average yield of S&P 500 stocks is currently 1.7%, up from 1.1% in 1999.
For income-sensitive investors who have seen their incomes suppressed over the past few years by historically low bond yields, these are especially welcoming developments. In fact, the yields of Washington Mutual
Now, on a short-term risk-return basis, Treasuries may still have the upper hand, but dividend-paying stocks are a necessary part of any retirement portfolio. They not only generate income, but also maintain portfolio growth throughout your retirement years.
Foolish final word
Despite these encouraging trends, not all companies can afford to increase their dividend payments. Some major corporations, like Eastman Kodak
That's why it's important to look for companies that not only have room to continue their current dividend payments, but can actually grow them for years to come.
Fool dividend expert James Early and the Motley Fool Income Investor service are always on the hunt for such companies. If you'd like to see the stocks they've recommended for subscribers, simply follow this link for a free 30-day trial to the service. There is no obligation to subscribe.
Todd Wenning does not own shares of any company mentioned. US Bancorp and Washington Mutual are Income Investor recommendations. Time Warner and FedEx are Stock Advisor choices. The Fool is investors writing for investors.
