Making Money The Slow-Fashioned Way

We never thought it would, certainly not so soon, but it has come to this: with a slowing housing market and an economy weighing on stock prices, many Wall Street strategists favor a traditional strategy to get cash regardless of the stock market's direction: dividends.

Stocks with dividends usually distribute cash to investors once a quarter. In a market that seems to be going nowhere but sideways, the steady income is one way investors can try to get ahead of the pack.

Moreover, in the event of a bear market, dividends may serve to cushion a portfolio. "Stocks paying significant dividends should provide some protection during an overall market decline," says Ken Tower, chief market strategist at CyberTrader, an online-trading unit of Charles Schwab. "They'll still fall, but not as much" as the rest of the market, because they are typically in defensive sectors, such as pharmaceuticals.

Dividend stocks haven't blown the doors off the market in recent years. Despite the 2003 reduction in the top tax rate on most dividends to 15%, dividend stocks haven't surged as many people expected. Small companies -- which usually shun dividends in order to allocate their cash to new equipment and employees -- have been Wall Street's darlings, helped by the expanding economy.

When stocks surged in 2003, in particular, the dividend-paying stocks within the Standard & Poor's 500-stock index were trounced by the nondividend components, including technology stocks that were rebounding from a bear-market beating.

But since then, stocks with dividends have delivered somewhat higher returns for investors. Last year, the dividend stocks in the S&P 500 posted a total return, from price change and dividends, of 9.3% -- beating the 8.2% return of the nondividend stocks.

This year, the spread has widened. The dividend stocks in the S&P 500 gained 5.1% through Thursday, compared with a 0.9% advance for stocks with no dividend. Concerns that more than two years of interest-rate increases by the Federal Reserve are slowing the economy have drawn investors to defensive, dividend-heavy sectors such as health care and utilities.

"Investors are turning more conservative," says Howard Silverblatt, senior index analyst at Standard & Poor's in New York. "They're looking for some stability, and while dividend stocks don't move as high in the good years, they don't go down as much during bad years."

http://online.wsj.com/article/SB115663197848246567.html?mod=hps_us_at_glance_most_pop