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Computerized Investing > July/August 2004

Implementing a Dividend Yield Screen

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by Wayne A. Thorp, CFA

The current market environment has been tough on many investors. With bond yields at historic lows and a volatile stock market, many investors are left wondering where to put their money. One investment that fell off the radar screen in recent years was the dividend-paying stock. However, dividends are in vogue once again, helped in large part by last year’s tax cut on dividend payments. The rate on qualified dividends was cut to 15% from marginal income tax rates that had been as high as 38.6% (dividends on most common stocks qualify for the tax break, while dividends on REITs and preferred stocks do not). Corporations also responded to the dividend tax cut: Since the beginning of 2003, according to a recent Money magazine, 23 of the S&P 500 companies paid dividends for the first time, while 233 upped their dividend payments at least once. All told, 372 of the S&P 500 companies now pay a dividend.

Dividends are attractive to investors because they contribute to returns in any market situation. In fact, since 1926 dividends have accounted for over 40% of stocks’ total returns, according to Thomson/Baseline. In addition, the income appeal of dividend-paying stocks helps limit steep losses during market downturns. However, just because a company pays a dividend does not mean it deserves your investment dollars. The question becomes: Which dividend-paying companies are good investment opportunities?

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