Banking On Dividends

As investors sell stocks and flee the markets indiscriminately, equity prices are declining at rates very similar to 2008. To be sure, fears about Europe, U.S. deficits, unemployment and economic growth are all real and warranted. Yet, as investors flee stocks and hide in the comfort of cash, accepting a near zero rate of return, they may not want to shut out dividend paying equities completely.

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All About Time
If you are parking money you don't need for years in cash, versus other assets for fear of capital loss, then you will likely awaken to a very nasty shock over the next several years. If you park $10,000 in a bank certificate of deposit earning 2% a year for five years, you will have $11,041 at the end of those five years. You may feel like you're a $1,000 richer, but if it takes $1.50 in year five to buy what $1 bought in year one, then you have actually lost money. Don't be fooled by the long-term threat of deflation; even during periods of little or no inflation, essential goods like gas, electricity and insurance have all substantially increased in price over the years. So, if you do have a period of years, the juicy dividend yields from today's most established and sound businesses will likely serve a better hedge to any type of inflation. (Inflation and deflation are opposite sides of the same coin. For more, see Protect Your Portfolio Against Inflation And Deflation.)

Valuations Matter
Investing in income paying stocks is only as good as the underlying valuation of the business. Valuations are now becoming attractive for long-term investors. Intel (Nasdaq:INTC) yields nearly 4%, and trades at a very low multiple to earnings and cash flow. Even if Intel shares appreciate by 3% a year, over the next five years, the total return of 7% a year is nothing to sneeze at for income seeking investors. Coca-Cola (NYSE:KO) yields nearly 3%, or about 50% more than 10 year U.S. Treasuries. I'd bet that over a 5 or 10 year period, Coke will outperform any "safe-haven" investment with very little long-term risk.

Oil giant ConocoPhillips (NYSE:COP) now yields over 4% after a slide in share price to around $60 from about $81. As the price of oil rises and falls, the stock price of major oil companies follows suit. Further declines in the price of oil will likely cause shares to fall further. Yet, the dividend isn't going anywhere, and will likely increase over time. Shares are reasonably valued today and if you're bullish on oil over the long run, then shares should reward you by appreciating. U.K.-based beverage business Diageo (NYSE:DEO) now yields 4.3%. If further turmoil in Europe sends shares lower, thereby boosting the yield, DEO will be an even more compelling income play. The company's brands are some of the best in the world, and Diageo is growing rapidly in emerging parts of the world. (For related reading, see The Power Of Dividend Growth.)

The Bottom Line
Now, more than ever, this is not the market for short-term investors. Only a truly long-term approach can survive the market volatility today. But, with corporate dividends growing each day, even conservative portfolios can find appropriate opportunities.

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