I wanted to take a break from the consumer-oriented pieces I’ve been doing lately to give you a complete update on the stock market in general, and dividend payments in particular.

As you know, I am a big believer in longer-term investing strategies, and a huge fan of stocks that reward shareholders with steady (preferably rising) dividend payments.

Unfortunately, the latter are getting harder and harder to find …

Dire Dividend News Continues Hitting the Tape

According to the latest data from Standard & Poor’s, the second quarter of 2009 saw just 233 dividend increases.

How does that stack up historically?

Well, it’s the worst second quarter on record since 1958!

In terms of decreases, it was the second-highest number, with 1958 taking the honors.

Even worse, S&P says the first half of 2009 along with the 12 months ending in June both hold the most dividend decreases and fewest increases since records began back in 1956.

This trend marks a sharp departure from the kind of dividend activity that we saw over the previous couple of years. Consider that in the second quarter of 2008 there were 455 positive dividend actions vs. 97 negative ones. And in 2007, the numbers were 542 hikes vs. just 18 decreases.

Yikes!

Does that mean income investors should give up all hope of getting solid payments from dividend stocks?

Of course not.

In fact, my Dividend Superstars subscribers have seen a number of their portfolio companies increase payments in the last year. And I expect many more dividend hikes this coming year, too.

However, the new reality is that you have to be very selective about what companies you buy … what market metrics you watch … and what sectors you overweight.

In the latest issue of Dividend Superstars, I gave my subscribers an in-depth look at precisely what groups of stocks have been outperforming during the 2009 rally, and also how each sector has been stacking up in terms of dividend payments.

While I don’t have nearly enough space to go into it all here, I’d certainly like to make a few important points.

First, as you’d expect, financial dividends have been evaporating at a rapid clip. And I don’t think the sector will be quick to regain its crown, either … especially not with all the new proposed legislation out there. So right now, I’m only recommending the purchase of one very niche dividend-paying financial company.

Second, many of the so-called “defensive” sectors that I favor have remained solid places for income investors to hide — both for steady dividends and for insulation from the overall market meltdown.

Third, the recent rally has been largely fueled by more aggressive stocks in more cyclical sectors. That tells me that investor expectations are very high right now, and any second-quarter earnings disappointments could send the broad indexes down in a hurry.

For All These Reasons, I Continue to Suggest
Approaching the Stock Market Conservatively

A few weeks ago, I warned you to consider selling off recently-purchased aggressive stocks that were sitting on substantial capital gains. And I want to reiterate that view today.

Sure, second-quarter earnings could blow off the roof and the stock market party could resume. But at this juncture, I would rather stay cautious and take some money off the table.

This is precisely what I have told my Dividend Superstars subscribers to do in the last few issues, and I have also recommended they position their portfolios for possible downside with a hedge.

And as I mentioned, I continue to overweight the portfolio with plenty of solid dividend-paying defensive names in sectors less likely to take severe hits should we see a “double-dip” recession. I consider that scenario a distinct possibility, especially given the fragile nature of the consumer … the tenuous “recovery” in housing … and the fiscal policies coming out of Washington.

Here are three of the specific characteristics I suggest looking for in this market:

#1. Sound fundamentals. Stick with the tried and true companies that have plenty of cash on their balance sheets, relatively low debt, good sales, profitable operations, etc.

#2. Businesses that are less sensitive to economic cycles. I’m amazed at how many investors have been piling into retail stocks, real estate shares, and other economically sensitive parts of the market.

Sure, these companies have been beaten down … and yes, they’ll represent good values someday. But I have yet to see real progress made in their underlying businesses right now. And I don’t believe we will see them make great strides in next quarter or two, either.

#3. Strong brands. I don’t care if the economy heads north, south, east or west next … companies with highly regarded products do well.

Again, at this point in the business cycle, I’m talking only about companies that sell brand name necessities though. Sure, Starbucks has terrific name recognition. But its business doesn’t pass point #2 above.

So make no mistake: I do think a sound portfolio should continue to have a stake in equities (as well as certain bonds). I just think you need to be selective, and remain relatively conservative.

After all, what are the alternatives?

Getting nearly nothing from CDs or money market funds? Or taking on substantial risk with long-term Treasury bonds?

Heck, most of my favorite dividend stocks are paying double, triple, even quadruple what you’d get from those investments … and that’s not even counting the added potential for capital gains.

Bottom line: Let’s keep our expectations in check … remain conservative and selective … and prepare our portfolios for maximum income with minimum risk.

Best wishes,

by Nilus Mattive
Money and Markets

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