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Payback Time For Dividend Stocks

Monday, 26 Apr 2010 | 1:33 PM ET

Risk-taking by investors, sparked by easy money from the Federal Reserve and a better-than-expected economic recovery, has pushed the S&P 500 up more than 9 percent year-to-date to a 19-month high. In the process, investors have left behind the steadier, income-generating stocks that over time actually end up making up a quite a large portion of your overall equity returns. For these dividend stocks, it’s payback time

“Investors should be wary about becoming overly aggressive with their equity portfolio positioning given the still fragile economic recovery,” wrote Brian Belski, Oppenheimer’s Chief Investment Strategist. They should consider “allocating some portion of their equity holdings toward stocks with solid dividend growth properties in order to guard against periods of potential stock market volatility.”

The market treaded water today following a week where earnings from growth companies such as Apple and Netflix wowed investors with their blowout quarters and caused them to keep the risk trade very much on. Today, the most widely used metric for expectations of future market gyrations -- the CBOE Volatility Index -- edged curiously higher.

To find just how neglected dividend stocks were this year, Belski broke the market up into five classes based on their dividend growth rates. The lowest quintile of dividend growers has returned a whopping 30 percent this year, triple the return of companies with a track record of steady dividend increases.

“We’ve been steadily moving our clients’ money into dividend payers this year,” said Patricia Edwards, founder of money management firm Storehouse Partners. “If you’re a CEO you have four choices: sit on cash and risk getting bought out, add capacity, pay a dividend, or buy another company. The latter two are clearly the wiser choices in this environment.”

Dividend growers that Edwards is buying include Johnson & Johnson, Campbell’s Soup and Coca-Cola. Belski named Kimberly –Clark, Hormel Foods and Colgate-Palmolive among his favorite dividend names. Like Edwards, he also recommends purchasing Johnson & Johnson.

This week will be a good test if the less exciting, but historically steadier group is ready to retake the high-flyers as many companies typically owned by investors in part for their dividend payouts, like Procter & Gamble and Exxon Mobil, report earnings this week.

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.

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Trader disclosure: On Apr 26, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Grasso Owns (NDAQ), (DYN), (LPX), (ASTM), (ABK), (BAC), (BGP), (C), (CVGI), (JPM), (NEM), (PRST), (PFE), (BA), (T), (CSCO), (X); Karabell Owns (CAT), (GS), (FXI), (FCX); Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (BTU), (NUE); Najarian Owns (C) Calls; Najarian Owns (STEC) Call Spread; Terranova Is Short (CMA), (LCC); Terranova Owns (HES), (TER), (SWN), (XCO), (AXP); Terranova Owns (C) Calls; Scaramucci Owns (GS), Skybridge Owns (GS); Seymour Owns (AAPL), (BAC), (GE), (INTC), (MSFT)

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CL
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CPB
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HRL
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JNJ
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1767
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KO
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NFLX
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PG
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VIX
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AAPL
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XOM
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