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Five Funds for Dividend Hunters

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Investment options for an income portfolio.

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Investors, spooked by two bear markets in just 10 years and a backdrop of continued economic uncertainty, are seeking shelter by diving into the indexes for dividend stocks.

"After a bear market, people get nervous and concerned," says Howard Silverblatt, Standard & Poor's senior index analyst. "Dividends are definitely back in style."

Investor enthusiasm for dividend stocks makes sense: They clearly outperform non-dividend payers over the long haul, says Silverblatt.

Some data to illustrate the point: Let's say an investor put $10,000 to work in two portfolios starting in 1979 -- one with dividend payers in the S&P 500 and another with non-payers -- and then walked away.

The dividend-paying portfolio would now be worth $348,879 while the non-paying portfolio would be worth $232,368.

"Dividends to some degree act like an anchor in the stock," says Silverblatt. "It holds them down. So, in good times, the stocks don't go up as much but, in bad times, they don't go down as much."

Question: Why would a company choose not to pay a dividend?

For some, it's for a very good, simple reason: They don't have the profits to make those payouts.

"Look at financial services," says Josh Peters, editor of Morningstar's DividendInvestor newsletter. "Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) were huge payers of dividends but they had to cut those dividends, either because they needed to shore up their capital position or because regulators forced them to do it."

Of course, there are other companies sitting on a lot of cash that still refuse to dish out dividends, like Apple (AAPL).

"When it wants to grow, it develops new products by hiring smart people, and putting them at a desk," Peters argues. "It's not spending a billion dollars on a steel mill. So they generate a tremendous amount of cash flow and they just let it pile up."

He adds, "There is some kind of institutional bias at companies like Apple, Cisco (CSCO), and Google (GOOG) that, for whatever reason, despite the fact that it would not hurt their shareholders or their ability to continue expanding internally, they just don't want to do it."

Peters points out another reason that some C-suite executives might not be gaga for dividends: Because they're more interested in padding their own, rather than the company's, bottom line.

"Frankly, misalignment of management incentives has a lot to do with it," he says.
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No positions in stocks mentioned.
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