An Opportunity We Haven't Seen in 50 Years

An Opportunity We Haven't Seen in 50 Years
By Chuck Saletta February 1, 2009 Comments (5)


Conventional investing wisdom says that if you're looking for income from your portfolio, you should buy bonds. Thanks to the market meltdown of 2008, however, stocks may well have become a better way to earn income from your investments.

That's right: For the first time in 50 years, the S&P 500 index offers investors a higher yield than the 10-Year U.S. Treasury note.

That's in addition to the long-term growth potential that stocks still have going for them -- and in spite of how far they may have fallen in 2008.

Dividends can rise, too
For an investor with a long-term time horizon, it really is a beautiful sight to behold.

See, stocks now have not just two but three things going for them: superior current income, long-term price appreciation, and increasing income.

After all, despite the rash of companies cutting their dividends in 2008, companies can -- and quite often do -- raise their dividends. And a company that consistently raises its dividends over time -- demonstrating that company's solidity and sustainability -- often outperforms the broader market.

Income today, more tomorrow
So if you truly want income in your portfolio, you shouldn't be looking at bonds. You should be looking at stocks that not only pay dividends, but have a history -- and a future -- of raising those dividends.

To see what might fit that bill right now, I ran a screen with the following criteria:
A yield higher than the 2.8% recently seen on the 10-Year U.S. Treasury note,
Dividend growth of at least 10% in 2008 -- in spite of the economic meltdown
A payout ratio less than 50%, which means the company pays out less than half of its earnings in the form of dividends -- giving the company room to raise its dividend in the future

Here are a few of the companies it returned:
Company
Recent Yield
2008 Dividend Increase
Payout Ratio

Waste Management (NYSE: WMI)
3.3%
11.7%
44%
Chevron (NYSE: CVX)
3.5%
11.8%
21%
PepsiCo (NYSE: PEP)
3.3%
18.5%
44%
United Technologies (NYSE: UTX)
3%
15%
26%
Automatic Data Processing (NYSE: ADP)
3.5%
26.1%
47%
Sysco (NYSE: SYY)
4%
15.8%
46%
Texas Instruments (NYSE: TXN)
2.8%
36.7%
28%

These aren't buy recommendations, just suggestions for further research.

But think about it: More cash in your pocket today.
The willingness to raise that payout even during troubled times. A legitimate shot at continued increases in the future. With an investing profile like that, what's not to love?

Start getting paid more
It's been half a century since the last time stocks paid investors more than 10-year Treasuries. At Motley Fool Income Investor, we're actively taking advantage of that situation by uncovering the strongest dividend-paying companies available at cheap-to-reasonable prices. With the powerful 1-2-3 punch of current income, income growth, and long-term capital appreciation on our side, we're well prepared to emerge victorious from this tumultuous market.

If you're ready to move past the panic of 2008 and arm your own portfolio with companies that reward their owners even during a global financial meltdown, now's the time to start.

At the time of publication, Fool contributor Chuck Saletta owned shares of Sysco. PepsiCo and Sysco are Motley Fool Income Investor recommendations. Waste Management is an Inside Value choice. The Fool has a disclosure policy.
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