Dividend funds offer investors safer haven

NEW YORK — With the stock market having jitters after a strong run-up in the past year, some investors might want something more low-key.

Dividend funds, though still subject to the vagaries of the stock market, can give comfort to investors looking for more defensive arenas.

While dividend payouts have increased in recent years, thanks in part to federal tax cuts enacted in 2003, many of the large, established companies that are traditional dividend payers are sitting on record levels of cash. That makes it easier for them to pay dividends and repurchase shares.

The large-capitalization stocks that are typical dividend providers, such as those that populate the Standard & Poor's 500 index, operate differently than startup companies that might be forced to reinvest most of their cash flow to support a nascent business.

Donald Taylor, a portfolio manager for the Franklin Rising Dividends Fund, looks not only for companies that make steady payouts, but those operations that are likely to boost their payments.

"We want companies that have a long record of consistent and substantial dividend increases," he said.

The fund screens for companies whose dividend has at least doubled over the past 10 years, though he notes the approximately 45 stocks that make up the fund have done better than that. On average, the dividends in the portfolio have increased 22 years in a row.

Not surprisingly, many of the types of stocks that meet the fund's requirements are industrial, financial and consumer companies — traditional dividend payers.

Taylor wants to first see that companies will remain consistent dividend payers. He noted that companies long known for their cyclical nature, such as energy utilities, have improved their dividend records in recent years but haven't yet proved themselves for an adequate amount of time to merit inclusion in the fund.

Taylor avoids companies that boost their dividend payments at the expense of growth.

Jeff Tjornehoj, an analyst at fund-tracker Lipper, offered a similar assessment.

"I would be cautious about pursuing yield without an eye for risk," he said. He noted that while there are companies with dividend yields above 10 percent, some might be in trouble.