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Dividend income: Earnings fall, you win

Today's Financial News - Posted October 6, 2008

Earnings are dropping and dividend checks are shrinking at a record rate. Is this the perfect buying opportunity? Take a look at Altria Group (NYSE:MO) to decide.

By Andrew Snyder

Baltimore – (TFN): The current market crisis has not been kind to many investors. According to a report released this morning, income investors have been hit particularly hard. The folks standing by their mailboxes waiting for quarterly dividend checks may be in for a rude surprise when those checks are dramatically smaller than they expected.

According to Standard & Poor’s, a company that measures everything finance, dividend seekers are looking at the worst market in nearly two generations. In fact, the third quarter of 2008, in terms of dividend reductions, is the worst in the 52-year history the agency has recorded dividend figures. Over $22 billion in dividend payments have been taken off the table.

During the third quarter of 2007, according to the report, just 21 companies reduced their dividend payouts. This year, 138 firms lowered their payouts. Not surprisingly, the amount of payout increases was dramatically lower as well. Only 346 companies raised their annual payouts, down from last year’s Q3 figure of 439.

Good news for you

This report highlights a very important lesson for investors.

Companies lower their dividends because of lowered corporate earnings. Dividends are simply the stockholders share of the profits. As profits lower, so will annual paychecks.

We all know earnings across the country will be reduced dramatically as the economy slows. The impact is already being felt. That is why we saw such a rush of dividend cuts over the past few months.

But remember, stock price valuations focus almost solely on earnings forecasts and potential. So as earnings drop, dividends will fall, but most importantly so will share prices. Many times, share price drops dramatically faster than dividend payouts which require board approval and all sorts of other factors to get implemented.

Because of this phenomenon, dividend payouts as a percentage of share price often rise during bear markets, giving smart investors a shot at some great low-priced, high-yield equity plays. Investors get paid a premium to wait until the bulls are back in charge.

For investors who do their homework and invest wisely, reports like this one can lead to great profit opportunities. While the market fumbles, you can get a nice quarterly paycheck. And once the cycle rebounds, you will be able to stand back and watch your shares soar in value.

I realize a lot of folks are too busy to do their homework or have no idea where to start their investment search. That is why I like to throw my picks out there.

A few weeks ago, I recommended shares of Altria Group (NYSE:MO) to dividend-seeking investors. The company pays a dividend of $1.28, which is a hefty 6.3% yield, and will stay strong no matter what the economy does. Over the last three weeks, while the rest of the market has plunged, this powerhouse has remained strong.

Get shares of this company and any other dividend-paying strongholds. Just because the headlines are bleak does not mean the profit potential is just as bad.


Next Article: Four stocks to buy on weakness: Rexam (REX), Scottish and Southern Energy (SSE), Aggreko (AGK) and HSBC (HSBA)

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Posted by Andrew Snyder · Filed Under Investment Strategies 

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