Dividend Funds Put Money in Your Pocket

Like nearly all equity funds, Thornburg Investment Income Builder (TIBAX - commentary - Cramer's Take) has suffered lately. But many Thornburg shareholders have little cause to be upset because they withdraw dividends from the fund, receiving monthly checks. And in the past year, the checks have increased 11%.

Thornburg's reliability is particularly noteworthy because dozens of companies have cut dividends in recent months. Portfolio manager Brian McMahon has dodged most of the trouble, sticking with solid shares that have continued to increase their dividends.

By picking steady stocks, McMahon has maintained his record for constantly raising dividends. In 2003, the fund paid annual dividends of $0.56 and had a share price of $11.94. Since then, the dividend has increased every year. Now the share price is $13.90, and Thornburg expects to distribute more than $1.00 in dividends for 2008. "Even in the worst market conditions, many companies continue raising dividends," says McMahon.

At a time when most investing approaches have soured, dividend strategies remain intriguing. By buying and holding a portfolio of dividend stocks, retirees and other income investors can obtain a stream of payments that rises over time.

Since stocks collapsed in recent months, dividends have come to seem particularly appealing. When stock prices fall, dividend yields rise. The yield on the S&P 500 is now around 2.9%, up from 1.8% a year ago. Plenty of blue-chip stocks yield more than 4%, and Thornburg yields 5.9%. With yields so high, many retirees can now afford to live strictly on dividends. That is a big change from the conditions of recent years. Beginning in the 1990s, yields fell well below 3%, and only the wealthiest retirees could live on dividends while leaving principal untouched.

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Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.