"We all know there are no sure things in investing," Byron R. Wien and Michelle Weinstein of Morgan Stanley write in their May 3 letter to clients, "just as there are no 'slam-dunks' in military intelligence." (That's a reference to CIA Director George J. Tenet's unfortunate comment, recounted by Bob Woodward, on the likelihood of weapons of mass destruction in Iraq.) Still, Wien and Weinstein offer something close to certainty: Stocks that pay (or better, increase) their dividends will do better than those that don't. If you had invested $100 in all dividend-paying stocks in 1973, you would have had $2,573 in 2003; invested in "dividend growers and initiators," the pot grew to $2,875. By contrast, with non-dividend-paying stocks, the $100 became just $683; for dividend cutters or eliminators, $848. Wien and Weinstein also believe that "conditions are ripe for companies to increase (or declare) dividends." The reasons are simple: First, there is over $2 trillion in cash on the balance sheets of S&P 500 companies; that's 21 percent of their market capitalizations, on average, compared with 16 percent since 1990. Second, the dividend yield is still low (1.6 percent, compared with a 20-year average of 2.6 percent), and the payout ratio -- that is, the proportion of earnings sent to investors as dividends -- is just 33 percent, again well below the average for the past two decades. And, third, taxes have been cut, so gross dividends become more valuable to shareholders. With those facts in mind, W&W combed the list of S&P companies to find those with lots of surplus cash, an Overweight rating from Morgan Stanley's analysts and a "possible or likely" dividend increase over the next 12 months. The screen produced 13 stocks. Six that I find particularly intriguing: Chubb Corp. (CB), insurance, with a dividend yield of 2.4 percent; Cendant Corp. (CD), travel and real estate services, 1.3 percent; Wells Fargo & Co. (WFC), bank, 3.3 percent; General Dynamics Corp. (GD), defense technology, 1.6 percent; U.S. Steel Corp. (X), 0.8 percent; and FirstEnergy Corp. (FE), electric utility, 4 percent. Check them out.
-- James K. Glassman