We all hate bear markets. It's difficult to watch stocks drop and savings disappear. But for most investors, bear markets should be exciting times -- and that's especially true if you're a dividend investor.

Here's why ...
All things being equal, when stock prices drop, dividend yields increase because you're paying less to buy the same stream of dividend payouts. For example, Bank of America's stock yielded a little more than 4% this time last year. Thanks to both the company's annual dividend increase and falling stock price, shares currently yield 7%!

So now you're able to buy a bigger stake in the company and get a larger dividend payout for the same amount of money. That, in short, is why investors should get excited about bear markets.

Take a look at how yields on some stalwarts today compare with their five-year average:


5-Year Average
Dividend Yield

Current Dividend Yield

Abbott Laboratories (NYSE: ABT)



Johnson & Johnson (NYSE: JNJ)



Procter & Gamble (NYSE: PG)



Toyota Motors (NYSE: TM)



Bank of Montreal (NYSE: BMO)



Annaly Capital Management (NYSE: NLY)



Data from DividendInvestor.com.

Precipitous pitfalls
Now, a high-dividend yield alone is not sufficient to judge whether a company is a good investment. In fact, a high yield could indicate underlying trouble if a company does not have:

  • A dividend fully funded through free cash flow
  • Improving operational returns
  • Manageable debt (less than 60% of capital)
  • Financial strength to continue growing and paying its dividend.

If these aren't present, the company may be a dividend-paying stock you want to avoid.

Here at the Fool, dividend gurus Andy Cross and James Early scour the market every month for the best high-yielding stocks of the moment -- and thanks to the bear market, they're now picking among some pretty great companies.

You can see the companies they're recommending today by clicking here to try Income Investor free for 30 days.

This article was first published Jan. 5, 2008. It has been updated.

Fool analyst Adam J. Wiederman owns shares of Johnson & Johnson. Annaly Capital Management, Johnson & Johnson, and Bank of America are Income Investor recommendations. The Motley Fool's disclosure policy is here.