Dividends have role

NEW YORK – Dividend funds once held an image of a reliable teammate – not a player languishing on the bench but also not the one drawing accolades from fans.

But dividend funds can be more than a reliable investment paying dividends even when stocks themselves are sputtering; not only do their underlying stock prices offer the chance for appreciation, the dividends themselves may also be on the rise.

Companies that pay dividends and the funds that track them have grown more attractive to some investors since lawmakers reduced taxes dividends face in 2003.

Judith Saryan of Eaton Vance Investment Management said dividends also are seen as a more wise use of a company’s cash.

Saryan, who helps run Eaton’s Tax-Managed Dividend Income Fund, contends some investors now look at dividend funds as a partial substitute to bonds. While she cautioned that stocks are naturally more volatile than bonds, she notes that more companies in the Standard & Poor’s 500 have begun paying dividends and have more readily increased the amount of the payments since the tax-law changes.

“If you’re a dividend-focused fund, your hunting ground tends to be the kind of companies that are in the S&P 500,” said Christopher Davis, an analyst at investment research provider Morningstar Inc.

The large companies of the S&P 500 are different from, say, startup technology companies that often choose to reinvest their money in the company rather than make a payment to shareholders.

Not all small companies are overlooked by dividend funds, however. Some funds focus on dividend growth rather than the current size of the payments.

“If you can find companies that you think have a high likelihood of consistent and significant dividend increases for a long time to come then you’ve got some real potential,” said Donald Taylor of Franklin Rising Dividends Fund.

He contends, for example, that a company with a dividend yield of 2 percent and with sizable potential could be a better bet than a company with a 4 percent yield but with less hope for growth.

Traditionally, dividends were favored by retirees who depended on them to supplement their income. Taylor noted that investors not soon facing retirement perhaps wouldn’t immediately need the income brought by bigger dividends – but that doesn’t mean these aren’t good investments for them. Even if retirement isn’t nearby, investors uneasy about the economy’s direction might find some security in them, he said.

Davis noted that because many mutual funds incorporate the word “dividend” into their names, investors “have to look under the hood” to determine whether a fund is appropriate for them, and should be careful about choosing a dividend fund simply because it has a high yield.

Dan Genter, president and CEO of RNC Genter, said when considering whether to invest in a dividend-paying stock he focuses on the company’s balance sheet, its commitment to maintaining and increasing a dividend as well as the strength of company’s growth prospects.