With the equity market suffering through one of its worst stretches since the Great Depression, it’s easy to overlook dividend-paying stocks.

After all, many companies have cut or suspended their dividend payments to shareholders in recent months to offset steep losses on their balance sheets. General Electric, Pfizer, Dow Chemical, Citigroup, J.P. Morgan and Motorola are just some of the big names that have clipped dividends to conserve cash in early 2009. And the outlook for the rest of the dividend universe isn’t so rosy either.

However, despite distressed market conditions, a select group of companies are taking the opposite tack, one portfolio manager observes. Ben Fischer, founder and managing director of NFJ Investment Group, sees opportunities to buy stocks that are growing their dividends rather than paring them back. “It is possible to find companies with good dividend outlooks with strong fundamentals,” he says. He cites 3M, Altria, Home Depot and Waste Management as several companies that have recently raised their dividends.

February 2009 Dividend Increases/Decreases

COMPANY	TYPE	TICKER	NEW	FORMER	CHANGE	SECTOR
3M Co		MMM	2.04	2.00	2.04%	Industrials
Abbott Laboratories		ABT	1.60	1.44	11.11%	Health Care
Allstate Corp		ALL	0.80	1.64	-51.22%	Financials
Apartment Investment & Mg		AIV	1.00	2.40	-58.33%	Financials
Archer-Daniels-Midland		ADM	0.56	0.52	7.69%	Consumer Staples
Avon Products		AVP	0.84	0.80	5.00%	Consumer Staples
CBS Corp 'B'		CBS	0.20	1.08	-81.48%	Consumer Discretionary
Chubb Corp		CB	1.40	1.32	6.06%	Financials
Citigroup Inc	SUSPENSION	C	0.00	0.04	-100.00%	Financials
Coca-Cola Co		KO	1.64	1.52	7.89%	Consumer Staples
Colgate-Palmolive		CL	1.76	1.60	10.00%	Consumer Staples
Constellation Energy Group		CEG	0.96	1.91	-49.74%	Utilities
Dow Chemical		DOW	0.60	1.68	-64.29%	Materials
Gannett Co		GCI	0.16	1.60	-90.00%	Consumer Discretionary
General Electric		GE	0.40	1.24	-67.74%	Industrials
Harley-Davidson		HOG	0.40	1.32	-69.70%	Consumer Discretionary
Honeywell Intl		HON	1.21	1.10	10.00%	Industrials
Integrys Energy Group		TEG	2.72	2.68	1.49%	Utilities
ITT Corp		ITT	0.85	0.70	21.43%	Industrials
JPMorgan Chase & Co		JPM	0.20	1.52	-86.84%	Financials
Lincoln Natl Corp		LNC	0.04	0.84	-95.24%	Financials
Macy's Inc		M	0.20	0.53	-62.26%	Consumer Discretionary
Meredith Corp		MDP	0.90	0.86	4.65%	Consumer Discretionary
Motorola, Inc	SUSPENSION	MOT	0.00	0.20	-100.00%	Information Technology
New York Times'A'	SUSPENSION	NYT	0.00	0.24	-100.00%	Consumer Discretionary
Pitney Bowes		PBI	1.44	1.40	2.86%	Industrials
Sherwin-Williams		SHW	1.42	1.40	1.43%	Consumer Discretionary
State Street Corp		STT	0.04	0.96	-95.83%	Financials
Waste Management		WMI	1.16	1.08	7.41%	Industrials

Source: Standard & Poor’s The stocks above are shown for illustration only and as a partial summary of dividend actions in the stock market in general. They are not presented as holdings in any Allianz NFJ fund.

Not only have some of these companies raised their dividends but their share prices are markedly lower than they were a year ago. “I’m a very optimistic buyer right now,” Fischer said. “This is the time to look ahead, not the time to despair. If we start recovering, we may be able to get back to the old high within a reasonable number of years."

Growing dividends amid such a significant contraction of corporate balance sheets and asset prices is considered a strong signal that a company is fiscally fit. For many investors, dividends combine the income reliability of bonds and the growth potential of stocks. While past performance is no guarantee of future results, historical evidence shows dividend-paying stocks have outperformed non-dividend stocks.

Dividend stocks have historically tended to give investors a smoother ride by virtue of relatively low volatility and a speedier recovery from bear markets. Additionally, they have been a good gauge of a company’s management discipline when it comes to prudent spending. Dividends have also emerged as a strong hedge against inflation. However, in certain market conditions non-dividend-paying stocks can outperform dividend-paying stocks.

The aggregated standard deviation for the Russell 3000 and its subsets of dividend-payers and non-dividend payers. Not annualized if less than 1 year.

Source: Fact Set, Zephyr. Standard deviation is an absolute measure of volatility measuring dispersion about an average which, for an index, depicts how widely the returns varied over a certain period of time. The greater the degree of dispersion, the greater the risk. Past performance of the stock market is no guarantee of its future results. The Russell 3000 Index is an unmanaged index of the 3,000 largest U.S. companies based on total market capitalization. Index returns are unmanaged. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions, or other expenses of investing. One cannot invest directly in an index.

Three key factors have contributed to the rise in popularity of dividend investing in the last decade. The first and perhaps the most obvious catalyst is the sheer growth in the number and diversity of companies that pay dividends. Whereas dividends were once the sole domain of large corporations with mature businesses, mostly financials and energy companies, dividends can now be found across all sectors and market capitalizations.

Legislation also played an integral role in making dividends more attractive. The 2003 Jobs and Growth Tax Relief and Reconciliation Act cut the tax rate on qualified dividends to match that of capital gains, which are capped at 15%. On a behavioral level, investors burned by the tech wreck have increasingly found that dividends can have a stabilizing effect on their portfolios.

Investing in dividend stocks now may be a way to redirect some assets out of lower-yielding Treasuries and cash equivalents, though investors would do so at higher risk. “The income strategy allows some investors who need income to find it, when bond yields and money-market yields are now so low,” says Neil Dwane, chief investment officer, Europe, at RCM, a global asset manager under the Allianz Global Investors umbrella with more than $12 billion in assets.

Dwane sees more opportunities to capture upside returns through dividend yields in Europe than in the United States. “In the U.S., [companies] have historically paid out less of their earnings in income and bought back more of their shares; therefore, I think there's more of a culture, in Europe and the U.K., of managements paying and sticking to the commitment of giving their shareholders the dividend returns. When you look at longer-term equity-related returns, it is the power of reinvesting the dividend income that gives you those exciting, long-term equity returns.”

Source: Russell 3000 via Standard & Poor’s, FactSet (The past performance of the stock market is no guarantee of its future results. Index returns are unmanaged. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions, or other expenses of investing. One cannot invest directly in an index.)