Gail MarksJarvis of the Chicago Tribune has an article about investors looking at dividend stocks over bonds. Walking from U.S. bonds can wind up paying dividends

With CDs and U.S. Treasury bonds paying almost no interest, where is an individual supposed to turn for income?

Increasingly, analysts are challenging investing principles about risk and suggesting solid, well-known, dividend-paying U.S. company stocks as near-bond substitutes.

Stocks, of course, are never to be considered pure substitutes for bonds. When companies go bankrupt, stock investors typically get nothing while corporate bond investors usually get something. (Investors in U.S. Treasury bonds have always been repaid every cent.) So disciplined investors are told to delineate stocks and bonds _ holding bonds for safety, even when they pay little interest, and stocks for the chance of making more money in the long run.

Yet with the government unwilling to tackle the nation's growing deficit, there are respected voices arguing that old conceptions of risk need re-examining.

"What's 'risky' and what's 'safe' is a question time alone will answer," argues analyst Jim Grant in his well-regarded "Grant's Interest Rate Observer" newsletter. "We've come to favor the 'risky' equity of Johnson & Johnson, Wal-Mart Stores, Kimberly Clark or ConAgra over the 'safe' claim on the U.S. Treasury."

Beyond the government's "well-exhibited capacity to conjure money," Grant says, "we can't think of a better reason not to own government securities." Hence, his preference for what he calls "big, stable, dividend-paying adaptive corporations" that "can survive in most monetary and fiscal settings."

It's a controversial position, and Miami financial planner Frank Armstrong says he wouldn't do it, although "it's not crazy." He points out that companies that appear solid at a point in time can evolve into a mess, stop paying dividends and the stocks can crash in value. This month BP, the company with the oil spill in the Gulf of Mexico, proved it by suspending its dividend _ leaving investors without the income they were expecting. Further, the stock has been plummeting.

"Dividends can create the illusion of safety," said Armstrong.

Yet when a company has a reputation of growing sales, earnings, margins and dividends consistently for many years, investors typically do have a certain level of confidence _ though not guarantees. Grant says 32 companies are bondlike and cheap now because investors are nervous about the economy.

He identified them with these criteria:
U.S.-headquartered corporations.

Market value of at least $5 billion.

Return on equity of greater than 15 percent for the latest calendar or fiscal year.

Dividend yield greater than 2 percent.

Debt-to-assets ratio of less than 35 percent.

Price-to-earnings ratio of less than 15.

For a sense of the selections, here's Grant's thinking on Johnson & Johnson:

The company has been around since 1887, and as investors worry about the declining euro, recession in Europe and paper money, Grant notes Johnson & Johnson survived the dollar devaluation of the '30s and subsequent money systems. It operates in 60 countries, has sales of $61.9 billion and brands such as Listerine, Tylenol and Sudafed, plus drugs and devices ranging from Procrit for red blood cell production to artificial hips _ in other words, a diverse group of necessary products and diverse markets.

Dividend investors want stocks that have reliably given dividends. J&J has raised dividend payout for 48 consecutive years. It's one of only four companies in the U.S. with a bond rating of AAA.

But no stock is without issues. There was a recall of Tylenol, Motrin, Zyrtec and Benadryl in April, and the new health care reform package is expected to reduce sales by $400 million to $500 million.

CONTENDERS:
Analyst Jim Grant found 32 dividend-issuing companies that met his criteria in seeking near-bond substitutes:

Exxon Mobil
Wal-Mart
Johnson & Johnson
Intel
Merck
Abbott Labs
United Technologies
3M
Kraft Foods
Altria Group
Bristol-Myers
Eli Lilly
Honeywell International
DuPont
Lockheed Martin
General Dynamics
Exelon
Kimberly-Clark
Aflac
Raytheon
Chubb
Public Service
Enterprise Group
Reynolds American
Air Products & Chemical
Campbell Soup
ConAgra
Sara Lee
McGraw-Hill
Diamond Offshore Drilling
Mattel
Constellation Energy
Darden Restaurants

Disclosure: The Div Guy owns shares of XOM, JNJ, INTC and ABT at the time of this post.

Rebecca L. McClay of MarketWatch wrote this about dividend stocks. Don't dismiss dividend-paying stocks

Lawrence Carrel, author of "Dividend Stocks for Dummies," advocates for dividend-heavy portfolios, saying volatile markets are a ripe time to pick paying stocks. With stock values unpredictable, investors find comfort in knowing that they will at least be paid the dividend even if they lose out on stock value, he said.

"More people want the income from dividend stocks now... they've had an awakening," Carrel said. "They are not gung-ho about growth anymore."

In his book, Carrel outlines several myths that investors harbor about dividend-paying stocks.

Myth 1: Avoid dividend-paying stocks in volatile markets

On the contrary, Carrel sees rocky times as the right time to invest in stocks where you can recoup profits without selling the shares.

"In general, it's a little less risky," Carrel said. "There's the idea that if I'm going to be in an environment and I can't be sure where the stock price is going to be, at least I will be able to walk away with profits from dividends."

Basil Herzstein, a financial planner with Gallers Financial in Rockville, Md., agrees. Dividend stocks have a built in base so that investors have cushion against market drops, he said.

He points to companies that have weathered the recession well, like GE (GE) , with a yield of 2.5%, The Blackstone Group (BX) , with a yield of about 4%, Microsoft (MSFT) , with a yield of 2%, and Annaly Capital Management (NLY) , with a yield of 15.2%.

"In the crappy market that we are in, these stocks have held their value and they're giving me a yield on my money," Herzstein said.

Myth 2: Dividend-paying stocks will give your wallet a quick boost

While paying stocks can add wealth in the long-run, don't expect them to offer fast returns. Instead, dividend-paying stocks are a good idea if you are buying for the long-term. Herzstein says he is looking eight to 10 years out when he selects stocks.

"Anybody who believes they can just double their money in a few months -- it's not going to happen," Herzstein said.

Myth 3: Companies that pay dividends will limit their growth

Traditionally, companies that pay dividends are well past their growth phase, but just because a company is issuing dividends doesn't mean it's not growing. Jon Ten Haagen of Ten Haagen Financial Group in Huntington, N.Y., advises investors to look for companies that are not paying out too much in dividends so that they can continue to grow.

"Be careful, because some are paying out 90% of their earnings as dividends, which doesn't give them much to invest back into the company," Ten Haagen said.

Myth 4: You should always invest in high-yield stocks

High yields are a plus, but investors should first consider the company's basic financial standing when selecting dividend stocks, Ten Haagen said. Yields shouldn't be the first priority. Instead, find the sector of the market that you like and then search for companies that seem undervalued. Be very selective about the quality of the company and consider the dividend as a bonus, not a deciding factor.

"I think of dividends as the icing on the cake," Ten Haagen said.


Myth 5: Dividend increases will not keep up with inflation

Dividends have historically kept up with inflation rates and then some, proving to be a big component of investors' overall return, said Gil Armour of SagePoint Financial in San Diego. While aggressive growth-oriented stocks often are the first to fare well during an economic recovery, Armour said that more stable dividend-paying value companies will be soon to follow. Armour predicts that established, dividend-paying stocks will be "the cream that rises to the top" in the next few years.

Myth 6: Dividend investing is for retirees

Dividend stocks tend to attract older investors, but they can benefit people of any age, as long as you don't expect fast returns. Dividend stocks create wealth over the long-run, not through a few payments. Armour said everyone should have exposure to both growth stocks like technology companies and value companies with dividends.

"It makes sense -- they tend to go in and out of favor," Armour said. However, older investors who need regular income might, indeed, want to weight investments in dividend-paying stocks.

Carrel, who says investors of all ages should maintain dividends for at least 50% of their portfolios, argues that younger people can use the power of compounding to significantly grow their portfolios in the long-run by reinvesting the dividends.

"If you follow a dividend strategy, especially if you're young, the power of boosting your portfolio in the long-run is very strong," Carrel said. "Over time, it grows exponentially."

Disclosure: The Div Guy owns shares of GE at the time of this post.

The Income Investor by Patrick Cain of Investor's Business Daily has a screen of high quality stocks with high dividend yields. Some Pipeline Stocks Boast Top Dividends

Much like growth investors often find stocks in the technology sector, income investors find companies with high dividends yields in the oil and gas transportation and pipeline industry.

In a screen IBD created to find high-quality stocks with strong dividends, 13 companies appeared.

Of those, four came from the industry, which ranked No. 65 of 197 industry groups in Thursday's IBD. Two weeks ago, this group was ranked 101st.

One reason this industry has so many dividend-rich companies is that many of its companies are master limited partnerships. An MLP, by contract, is forced to give back to investors much of its profits. That translates to strong dividends.

One of the strongest in this class is El Paso Pipeline Partners (EPB). The company transports natural gas, which has been steadily rising in price. The Houston-based firm is also one of the handful of sector leaders highlighted with a box in the IBD Research Tables.

El Paso Pipeline pays shareholders a 5.2% annual dividend yield. Shares are at an all-time high, and its fundamentals are stellar. In the most recent quarter, the MLP saw earnings grow 32% and sales 23%.

Fellow Houston-based pipeline company Enbridge Energy Partners (EEP) owns 1,900-miles of the U.S. portion of the world's longest liquid petroleum pipeline. With its Canadian assets, it has about 3,500 miles of pipeline in North America. Its dividend yield is 7.9%. Enbridge's earnings and sales grew in its latest quarter for the first time since the June 2008-ended period.

Kinder Morgan (KMP) has a dividend that yields 6.8% a year. This pipeline MLP has been finding support at its 40-week line as it works on a base. Enterprise Products Partners (EPD) was the fourth MLP making the screen. Its annualized dividend yield is 6.7%.

Disclosure: The Div Guy owns shares of KMP at the time of this post.

AP Personal Finance Writer Candice Choi has a recent report on some dividend stock increases. Optimistic companies promising bigger payouts

Corporate America is betting cash -- in the form of higher dividend payouts -- that the economy is rebounding.

Three major U.S. companies -- Caterpillar Inc., Target Corp. and Viacom Inc. -- hiked their dividends Wednesday, signaling a growing optimism about the path of the global economy. Medical device maker C.R. Bard Inc. also raised its dividend.

So far this year, that means 135 companies have raised, initiated or reinstated dividends, while only two companies have cut them, according to Standard & Poor's. The net effect is a $10.4 billion increase in dividend payouts for the year.

By contrast, dividend payouts last year dropped by a record $39.8 billion, or 21 percent, overall. The net decrease was the result of 79 dividend increases and 63 decreases.

Dividends are cash that companies pay to shareholders on a quarterly basis. Promising a higher regular payout means a company is confident about its future earning potential.

Caterpillar, the world's largest maker of construction and mining equipment, said it was raising its quarterly dividend by 5 percent to 44 cents. The hike comes as demand continues to grow for the company's heavy equipment amid a global economic recovery.

Viacom's dividend of 15 cents per Class A and B common share declared Wednesday is the company's first. The entertainment conglomerate, which owns MTV Networks and Paramount Pictures, also said it plans to resume a stock repurchase program that was suspended during the financial crisis.

Discount retailer Target raised its quarterly dividend to 25 cents per share, up 45 percent from 17 cents previously.

Three other companies raised dividends on Tuesday: liquor company Brown-Forman Corp., engineering and construction company KBR Inc. and agribusiness company Bunge Ltd.

And more will surely follow later this year, said Howard Silverblatt, an S&P analyst. Many companies are likely waiting to have a couple of quarters of solid performance behind them before raising their dividends, he said. That should result in a surge of dividend hikes in the fourth quarter, he said.

Disclosure: The Div Guy does not own any of the stocks in this post at this time.

Here are the top 20 stocks in my Dividend Portfolio as of 5/31/10 ranked by size of holdings. I know some if these stocks no longer pay dividends but I have keep them for gains as the economy recovers. I will look to sell my stocks that are no longer paying dividends throughout 2010.

1. Kinder Morgan Energy (KMP) USA
2. DCP Midstream Partners (DPM) USA
3. Barclays PLC (BCS) UK
4. HRPT Properties Trust (HRP) USA
5. Penn West Energy Trust (PWE) Canada
6. Procter & Gamble (PG) USA
7. General Electric Company (GE) USA
8. Johnson & Johnson (JNJ) USA
9. American Capital (ACAS) USA
10. ONEOK, Inc. (OKE) USA
11. Aircastle Limited (AYR) USA
12. Banco Santander (STD) Spain
13. GlaxoSmithKline (GSK) UK
14. Diana Shipping Inc. (DSX) Greece
15. Unilever NV (UN) Netherlands
16. Pepsi (PEP) USA
17. AT&T (T) USA
18. Newell Rubbermaid (NWL) USA
19. Abbott Labs (ABT) USA
20. Exxon Mobil Corporation (XOM) USA


Here are the top 10 holdings of the Vanguard Dividend Appreciation ETF (VIG) as of April 30, 2010. The Fund will track the performance of the Dividend Achievers Select Index™, an index created exclusively for Vanguard by Mergent which follows U.S.-listed companies that have increased their annual regular dividends for at least the past 10 consecutive years and have met specific liquidity screening criteria. The Dividend Achievers Select Index uses additional proprietary methodology to focus on approximately 200 stocks, and offers investors access to companies with consistent earnings growth and bolstered diversification across securities, sectors and investment styles.

1. Pepsico (PEP) USA
2. Chevron (CVX) USA
2. McDonald's (MCD) USA
4. Exxon Mobil Corporation (XOM) USA
5. International Business Machines (IBM) USA
6. Procter & Gamble (PG) USA
7. Johnson & Johnson (JNJ) USA
8. United Technologies (UTX) USA
9. Walmart (WMT) USA
10. Coca-Cola (KO) USA

My Annualized Dividend Income as of the end of May increased to $5,955 from $5,865 for the month. This means my dividend stocks will pay $5,955 in dividends over the next 12 months.

I made over $1,000 of dividend stock purchases for the month from dividend distributions and sales of non dividend stocks. It looks like the economy is worried about the problems with with Greece and some other European countries with mounting government debt. There are still a few companies increasing their dividends for later this year.

I am close to my Dividend Income Goal of $6,000 for the end of 2010. I plan to sell off some stocks that are no longer paying dividend throughout the year and add a few hundred dollars a month to our dividend paying stocks.

Most of my stocks are held in my Zecco Trading account and the rest are DRIPs. The dividends from my stocks are reinvested but I am keeping track of the amount of income I could receive once I retire or choose to receive the dividends in cash.

I will post my Top 20 Stock Holdings on Thursday.

As of the end of May our Net Worth decreased to $798,207 from $839,955 for the month which is a 4.97% decrease. The drop in net worth is tied to the stock market drop in May.

The breakout is as follows:
ASSETS
Retirement Accounts $397,431
Taxable Accounts $128,700
Cash $23,342
Home $205,000
Cars $7,800
Personal Property $3,000
Kids 529 Accounts $32,934

Here is the summary for this month:

The stock market had it's worst May since 1940 with an 8% decline. My stock account went down 7.9% and my retirement accounts went down 6.9% for the month of May. The market reacted to the fear created by the growing debt problems of Greece even thought the US economy had some positive signs of growth.

We are still debt free since we paid off our credit card debt. We will continue to use our credit cards for rewards but payoff the balances each month. I received $924 in dividends for the month and have used the cash from these dividends to make additional stock purchases of our dividend stocks but I have not been adding much extra money.

We will be building up our cash over the next few months to increase our cash reserves. You can click on my Net Worth graph on the right to see the changes in each category from the previous month. I continued funding our Roth IRA's each month.

I will post my Dividend Income Update on Wednesday.