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Barron’s: Consider Stocks with Low but Rising Dividends

By Dan Weil   |   Tuesday, 23 Oct 2012 10:46 AM

With investors piling into dividend stocks in search of income, the temptation is to go for high yielders.

But investors would be better off looking for stocks with modest but growing dividend payouts, according to Barron’s.

Of the six companies in the Standard & Poor’s 500 Index that carry yields of more than 6 percent, “all face declining sales, high debt or other challenges,” Jack Hough writes.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

Moreover, the high dividend stocks are pricey. Among the S&P 500 stocks that pay dividends, those that allocate over 50 percent of profit to dividends recently had a median price-to-earnings ratio of 16.3, well above the 13.9 reading for those that provide less than half.

Hough cites an example of a low dividend stock that has paid off big time for investors. If you bought Darden Restaurants (DRI) 10 years ago, you paid $19 a share for a paltry 0.8 percent yield.

But Darden has boosted its dividend regularly since then, and now yields a buoyant 3.7 percent, which is equivalent to 10 percent based on that $19 purchase price.

Hough cites four low-dividend stocks that have potential to keep increasing their payments to consider:

• Associated Banc-Corp (ASBC)

• Coca-Cola Enterprises (CCE)

• IBM (IBM)

• Stryker (SYK)

Morningstar’s dividend guru Josh Peters likes stocks with mid-level payouts.

“A lot more low-3-percent yielders are trading at respectable valuations than the group of stocks paying over 4 percent,” he says on Morningstar.com. “And you usually get much better dividend growth and prospective total returns to boot.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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