Many happy returns

Dick Bristol, a 72-year-old retired Air Force navigator from Biloxi, Miss., in the lobby of the First Baptist Church in Biloxi. He has been a fan of dividend investing for about 10 years. Bristol appreciates them for the regular income they provide even w

CHICAGO -- There's new hope for retirees looking for a solid return on their money.

It's certainly been a challenge to find in this economy. Rates on CDs and money-market accounts are microscopic. Bond yields have shrunk so low that even locking up your money in a 10-year government Treasury pays less than 3 percent. And trusting the turbulent stock market again is hard for many.

Now retirees and others looking for more income without undue risk may want to take a fresh look at an old standby: dividend stocks.

Dividends are regaining their strength after falling from favor when companies cut them during the recession. More than a third of companies in the Standard & Poor's 500 have increased quarterly payouts this year and just three have cut them, a return to pre-meltdown levels and a vote of confidence in the future.

Money managers see companies that are confident enough to raise dividends in a weak economy as particularly safe bets, both to remain stable and to keep growing their payouts well into the future.

Tom Forester, portfolio manager of the Forester Value Fund in Lake Forest, Ill., is a big fan of dividends. All but two of the fund's 40 holdings are dividend stocks.

"When it's harder for companies to grow earnings, your stock appreciation is limited. But if the dividend's safe, you continue to get that while you wait," he says.

Dick Bristol, 72, of Biloxi, Miss., enjoys getting his monthly brokerage statements and seeing the influx of new dividend money regardless of what's happening with the economy or on Wall Street.

He knows he can count on an average of a few hundred dollars in dividend payouts being added every month to a portfolio that now totals about $100,000. His 15 holdings include high-yielding energy stocks Cross Timbers Royalty Trust (CRT), BP Prudhoe Bay Royalty Trust Co. (BPT) and Oneok Partners LP (OKS), as well as Emerson Electric Co. (EMR) and Lowe's Cos. (LOW).

"It really makes a big difference when the market is down," the retired flight navigator says. "It's good to see that those dividends keep on coming in. To me, that makes it worth the effort of investing."

Bristol began buying dividend stocks in 2000 when his wife, Mary, told him that if he wanted to invest he'd better produce some concrete results.

Those regular dividend payments accomplished that and then some.

Thanks to some wise stock choices and a big boost from the dividends, he has more than doubled his original investment of $40,000 during a period when the S&P 500 fell about 25 percent.

Dividend-paying companies also allow him to sleep easier as he feels he doesn't have to monitor them as closely as more volatile growth stocks. Growth stocks typically reinvest their profits in the business and investors only pocket gains when the stocks are sold at a profit.

Another reason for investors to embrace solid dividend stocks is protection from future inflation. In fact, investment guru Jeremy Siegel wrote last month, they may be a safer bet than bonds for investors looking for both more attractive income and inflation protection.

Due to economic growth the dividends from stocks historically have increased more than inflation, noted Siegel, finance professor at the University of Pennsylvania's Wharton School.

Don't buy a stock just for its high dividend yield, however. A high yield without other strengths could be a signal a company is in trouble, because as the stock price declines, the yield goes up.

You want to also look for companies with healthy balance sheets, strong management, leadership positions in their industries and solid cash flow -- all signs of a bright future.

Congress is expected to let the current 15 percent tax rate on dividends expire at the end of the year in the quest to narrow the huge federal deficit. Most taxpayers are likely to face a dividend rate of about 25 percent, while those in the highest bracket could pay 39.6 percent.

Even those rates will not lessen dividends' long-term appeal to retirees looking for a steady income stream and relative safety. "Dividends can make investors feel secure," says Josh Peters, editor of Morningstar DividendInvestor. "They're about collecting your fair share of returns."