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Tuesday, August 15, 2006

Dividend Investing aids in a Volatile Market

By Yaser Anwar, CSC of Stock Market Beat

A USA Today article says that investment in dividend-paying stocks is great way for investors to insulate themselves from market volatility.

The paper cites gas prices that are up 120% from just five years ago. It also reports that housing starts are expected to fall 9.1% this year, while "the prime rate has risen to 8.25%, up from 7.25% in January and 4.25% in August 2004."

"The average 30-year, fixed-rate mortgage is 6.55%, up from 5.77% a year ago, making it harder for new buyers to enter the market," according to the article.

Fresh international conflict and recent heightened terror alerts are bound to squash investors' inclination to buy stocks. But the paper insists there is one way to protect assets while ensuring some profit.

"One way to take a bit of the worry out of stock investing in perilous times is to look for shares of companies with a decent dividend payout. Dividends are cash payouts that companies give investors, normally at regular intervals."

The article's author John Waggoner describes some of the benefits of dividend-paying stocks:

1) Higher returns.
"The S&P 500 has gained 441% over the past 20 years. Throw in reinvested dividends, however, and the index has soared 763%."

2) Lower taxes.
"If you earn 4% on a bank CD, you'll have to pay taxes at your income tax rate. If you're in the maximum 35% tax bracket, your 4% return will become 2.6%. But the tax on long-term dividends is 15%."

3)Higher payouts.
"A $1,000, 10-year Treasury note will pay $48.88 each year until 2016. If inflation averages 3% a year, your $48.88 will then have the buying power of $36.04 - 26% less."

Waggoner says that a number of companies gradually increase their dividend payouts - and that can help you combat inflationary pressures. "Companies that pay dividends are particularly attractive when the stock market looks weak," he cites.

"In the past 12 months, dividend-paying companies in the S&P 500 have gained 7.0%, vs. a 1.2% loss for non-payers. This year, dividend payers have gained 4.4%, vs. a 4.2% loss for non-payers."

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