Look for Rising Payouts in Utilities

Focus: INCOME

Ari Charney Image Ari Charney Analyst and Associate Editor, Canadian Edge and Personal Finance

There's a simple way to make sure your income stocks are performing up to snuff, and that's to make sure their payouts are either rock-solid or rising for the right reasons, notes Ari Charney of Personal Finance.

After an incredible run amid the mar­ket tumult of 2011, dividend-pay­ing stocks were due for a breather in 2012. As such, our holdings gained 7% last year versus a 16% re­turn for the S&P 500.

Aside from the global economic mal­aise, our stocks faced the additional headwind of Congress’ contentious negotiations to avert the so-called fiscal cliff. The deal that was finally struck at the outset of the New Year came too late as far as the market’s fourth-quarter performance was concerned.

Although our stocks suffered in sym­pathy with the broad market, they once again demonstrated their ability to pre­serve wealth when the market drops. That’s despite the fact that dividend stocks sold off as income investors fret­ted over a possible change in dividend taxes that largely failed to materialize. While the market lost 0.4% dur­ing the fourth quarter, our stocks gained 0.4%.

Over the long term, safe businesses coupled with growing dividend payouts result in a portfolio that beats the mar­ket while incurring less risk.

That gulf in performance may not sound like much, but thanks to the magic and power of compounding, it means a difference of almost 54 per­centage points—for a total return of 146.5%. Almost as important, our portfolio achieved this outperfor­mance with significantly less volatility than the market.