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Investors Steer to Safety of Dividend Stocks

BOSTON ( TheStreet) -- Six weeks of dropping stock-market indices and dimming prospects for the global economy have investors looking for a safe harbor. That may very well be summed up in one word: dividends.

More than in many years, especially since the Great Recession, dividend-yielding stocks are a crucial consideration for investors.

Dan Newhall, a principal in Vanguard's Portfolo Review Department, is among the overseers of the Vanguard Dividend Growth Fund (VDIGX), which has $5.7 billion in assets. He says there has been "an incredible amount of interest in anything that is income-oriented."

That's because a sluggish economy has produced slow inflation -- outside of energy and food prices, he says. Plus, Newhall says, investors have shied away from the equity market.

But therein lies the dilemma. Investors want to get back into the equity market because their CDs, bank accounts and money markets aren't yielding much and even if they did pretty well with bond funds, those yields have also come down. However, looking for income brings investors face-to-face with big risks in the stock market, which has fallen 7% in the past month, as measured by the S&P 500 Index. That leaves the benchmark index up only about 2% for this year.

Newhall says that's why many are paying more attention to dividend-producing stocks and funds such as the Vanguard Dividend Growth Fund.

The fund invests in "very high-quality" dividend-paying companies that "have attractive prospects and have provided very appealing downside protection," he says. The test of that philosophy came in 2008 when the fund was down 26%. "It was painful, he says. "But the market was down 38%.

Newhall says Don Kilbride is the portfolio manager at Wellington Management Co. who looks to construct and build the Vanguard Dividend Growth Fund's portfolio as one that is capable of delivering a growing stream of income over longer periods of time. His objective is to have those dividend payments exceed inflation by about 3% a year on average.

The approach to finding "high-quality" dividend yields has evolved over the years.

"It is not too far in the past where people didn't pay much attention to dividends," he says. "Frankly, companies and their management weren't very incentivized to pay dividends, especially with stock-option plans that were based entirely upon stock price appreciation and that is how they were getting compensated. They didn't really see the benefit. They'd rather plow everything back into growth projects that may or may not deliver the kinds of returns that they should deliver, or buy back stock."

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