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The Case For Dividend Stocks

 February 15, 2013 09:52 AM
 


by Chuck Carlson, editor DRIP Investor

Low interest rates remain a positive for dividend stocks in 2013. As it becomes more difficult to generate meaningful returns from fixed-income investments, you are likely to see a transition from bonds to stocks in 2013.

In fact, I believe this transition is already taking place and will accelerate if the stock market can maintain its upward pace that we have seen so far this year.

Clarity on the tax situation is also a plus. Admittedly, I'm not a fan of seeing anyone's tax rates on dividends increasing. Nevertheless, given where dividend rates were headed without the fiscal-cliff compromise, the situation could have been much worse.

[Related -United States Steel Corporation (X): Small Insider Buy, Big Rewards?]

With much of the tax uncertainty on dividends removed, and many investors left unaffected by the tax changes, I expect there to be renewed interest in dividend stocks.

In addition, there's plenty of room for more dividend increases. By historical standards, the percentage of corporate profits that are being paid out to shareholders in the form of dividends is still on the low side.

Corporate America is paying out just slightly more than one-third of profits in dividends, down from the historical average of 52%. Thus, companies have plenty of flexibility to boost dividends if they so choose.

If you are looking to add quality dividend payers to your portfolio, consider stocks that S&P has coined "dividend aristocrats." These are stocks that have raised dividends annually for at least 20 years.

[Related -Procter & Gamble (PG) Dividend Stock Analysis]

Some of my favorites among these dividend aristocrats are Aflac (AFL), the insurance firm; American States Water (AWR), a water utility in California; and Exxon Mobil (XOM), the oil giant.

Others that merit attention from long-term investors are PepsiCo (PEP) and Procter & Gamble (PG). Both offer solid yields and ample dividend growth, and I expect both to perform better in 2013 as earnings recover.

Another common thread among these picks is that they all allow any investor to buy the first share and every share of stock directly from the company.

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