European Dividend Achievers Not Invincible, But Still a Solid Strategy

As the wise King Solomon noted 3,000 years ago, "to everything there is a
season." Solomon had no knowledge of the stock market, of course, but his
words can certainly be applied. There is a time to be invested in growth stocks
such as the 1990s and a time to be invested in value such as the mid-2000s.
And as recent experience has shown, there is a time to be out of the market
altogether. So what "season" might we be in today? If the past two months of
volatility are any indication, a rough one. For the past year, I've been
advocating a high-dividend strategy, though this was more by process of
elimination than anything else. Consider: Bonds, by and large, do not yield
enough to warrant serious consideration. Why risk capital loss for a puny 2%
yield? You'd be better off keeping your funds liquid, in cash. But Cash
yields virtually zero. Even if inflation remains benign and the history of
credit bubbles and busts suggest it will you're likely going to see a
negative real return on your cash for the rest of this decade. Stocks, though
cheap, can get a lot cheaper. While I am not a bear by any stretch, investors
should have reasonable assumptions about market returns. Stocks might go much
higher from current levels, but given the ongoing fallout from the U.S. mortgage
crisis and the never-ending sovereign debt drama coming out of Europe, it
promises to be a rough ride. Gold is exhibiting all of the signs of a bubble,
and that bubble might already be in the process of deflating (see " Is it Time
to Call the Top? "). But even if gold enjoys another leg up, do you want to
bet your financial future on an asset whose value is determined purely by the
whims of speculators? Remember, gold has no intrinsic value. It has no earnings,
and it pays no income. It's worth only what the market says it's worth
today, and the market can be a rather fickle mistress. Oil and gas Master
Limited Partnerships and subsectors of the REIT universe that are less
economically sensitive such as apartments, self-storage or senior living
facilities are priced reasonably and generally pay out a healthy amount of cash
distributions. But you can't put your entire net worth into pipelines and
REITs. Both are highly sensitive to interest rate movements and to changes in
the tax code. As investors in the Canadian royalty trust sector learned a few
years ago, changes in the tax code can absolutely wreck a portfolio. Most
financial planners would not advocate putting more than 10% to 15% in each, and
I am inclined to agree. So, for lack of anywhere else to go, I come back to
high-dividend equities. The case here is pretty straightforward. Stocks that pay
a dividend guarantee you at least a modest realized return, even if the share
price goes nowhere. And most importantly, healthy companies raise their
dividends over time, and not always by a trivial amount. Microsoft (NASDAQ: MSFT
), for example, raised its dividend by a full 25% this quarter.