- The Washington Times - Monday, November 10, 2008

NEW YORK

Wall Street is showing signs of settling down, but the economy is still quite troubled, so putting money into funds that focus on dividends might help some investors regain their confidence in the market.

The steady returns of dividends can be attractive when the outlook for corporate profits is murky and when interest rates are low, leaving other income-generating investments like bonds with meager yields. But it’s important that investors ask a few questions before simply jumping into dividend funds.

First, there is no guarantee that a troubled company won’t cut its dividend or that the market will regain its appetite for companies with greater growth potential and less focus on payouts to investors. More important, investors who have seen stocks flattened by the market’s yearlong retreat should first consider whether shifting money from one fund to another is wise, or whether that will simply lock in big losses. Making gradual changes can help guard against panicky investment decisions.

For investors looking to shift some holdings or dip their toes into the market, dividend funds can offer reassurance because even when share prices fall, the flow of dividends can help make negative returns less severe.

Stocks that pay dividends tend to trade with less volatility because of the financial discipline required to meet recurring payments and the more mature nature of their businesses, noted Dan Genter, president and chief investment officer of RNC Genter.

Mr. Genter noted that some of its funds have declined less than the broader stock market because of the income from dividends. The Standard and Poor 500, a benchmark for the stock market and many mutual funds, is down about 35 percent from its October 2007 peak. Mr. Genter’s dividend funds have lost only half to two-thirds as much as the market, he said.

While the stock market has shown somewhat less nervousness since its mid-October lows thanks in part to the government’s efforts to stabilize banks, it’s not clear how long it might take stocks to recover - recent days have shown there’s still plenty of turbulence on Wall Street.

“It is going to reduce your volatility compared to the overall equity market,” Mr. Genter said, adding that a long-term focus is best, particularly in a bruising market.

“You don’t necessarily want to jump over to this because you were looking for a place to hide,” he said.

Frank Ingarra, co-portfolio manager at Hennessy Funds, noted that the income can trump what would be coming from other investments. The company employs a so-called Dogs of the Dow strategy that involves investing in 10 of the 30 stocks in the Dow Jones Industrial Average that are out of favor but have the highest dividend yields. The idea is to boost overall returns by capturing a mix of potential gains from increases in share prices and regular dividends.

Like any investment, dividend funds carry risks. Financial services companies have long been known as big dividend payers. But with so much of the banking sector in turmoil because of bad debt, investors should consider whether a dividend fund is drawing too much of its income from troubled companies that could be forced to cut their dividends.

And even if a dividend fund looks attractive, there are tax considerations. Investors should ask before putting money into a fund whether a payout is imminent. Otherwise a new investor could receive a payout but also a hefty tax bill. It’s better to wait until after a payout and then have more time to accumulate income before paying taxes.

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