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February 23, 2009 Issue Posted February 12, 2009, 5:00PM EST

Inside Wall Street

Follow the Juicy Dividends

Dividends have been a welcome cushion in the stock market, particularly in tough times. But with many companies cutting or eliminating their payouts to shareholders, relying on them has become iffy. A better way of playing the dividend game is to find companies that have a record of raising their dividends year after year.

"In most cases, shares of such companies outperform the market over the long term," notes Richard Helm, who heads the large-cap Value Fund at investment firm Cohen & Steers, which manages $15 billion. According to data from Ned Davis Research, companies that have increased dividends for at least five years beat the market in every year from 1972 to 2008. Davis notes that during that time they posted an average yearly gain of 8.9%, compared with 6.2% for the Standard & Poor's 500-stock index. Those that usually show little change in their payouts gained just 6.3%. As for Cohen & Steers Value fund's own performance, it beat the S&P on a relative basis in the difficult three-year period that ended on Jan. 31, 2009, with an average yearly loss of 9.17% compared with the S&P's loss of 11.77%.

Over the long run, Helm says adopting a dividend- growth strategy for your portfolio helps boost returns. "It has been my experience that an emphasis on a combination of high-quality businesses coupled with dividend growth produces not only better returns over a full market cycle, but also does so with low volatility," Helm says.

Two major stocks in Helm's portfolio are General Dynamics (GD) (GD), a leader in combat vehicles, armaments, munitions, ships, and business jets; and Teva Pharmaceutical Industries (TEVA) (TEVA), the world's largest maker of generic drugs.

GD has raised its dividend 17% annually, averaged over a five-year period. Its current dividend yield is 2.4%. GD shares, which retreated to 53.89 on Feb. 11 from a 52-week high of 94 last May, outperformed the S&P in the past two years. Based on the company's fundamentals, PriceTarget Research rates GD "positive," with a 12-month price target of 116.

Israel's Teva posted estimated sales of $11 billion in 2008, and analysts expect $14.9 billion in 2009. Teva has seen payouts grow a yearly average of 28.9% over a recent five-year period. Teva's stock, now at 43.13 a share, is down from 49 a year ago. But it handily beat the S&P in the two-year period ended Dec. 31, 2008, with a gain of 39.8%, vs. S&P's loss of 35.5%.

Analyst Phillip Seligman of Standard & Poor's, who rates Teva a strong buy, figures it will earn $2.83 a share in 2008, and $3 in 2009.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

Taking a Flyer on Ford

Among the worst-regarded U.S. stocks are those of carmakers. And General Motors' (GM) move on Feb. 10 to cut 10,000 more jobs added to investor fears. Ford Motor (F) (F) is also on the ropes, down to 1.85 on Feb. 11 from a 52-week high of 8.79 in April, but some daring pros are starting to buy.

"Ford has a fighting chance of getting out of the industry's deep hole," says Carl Birkelbach, president of Birkelbach Investor Securities, who recently bought stock, confident it will triple in a year. Ford, he notes, is the only U.S. carmaker to gain market share three months in a row. He believes Ford will start growing again once President Obama's stimulus plan takes hold. Vanguard bought 5.6 million shares on Dec. 31, lifting its stake to 2.9%.

Of the 13 analysts who track Ford, only Michael Ward of Soleil Securities rates it a buy, with a one-year target of 5.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

—Gene Marcial

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