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We Are in the ‘Golden Age of Dividends,’ Says Hersh Cohen

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Are we in "the golden age of dividends"?

Hersh Cohen, who has been investing professionally for 45 years, should know - and he says it is indeed the best of times for income-seeking investors, thanks to low dividend taxes and the proven commitment of great American companies to share their cash with shareholders through higher payouts.

Cohen, co-chief investment officer of Legg Mason Inc.’s (LM) ClearBridge Investments and co-manager of ClearBridge Equity Income (SOPAX), says in the attached video: “I’ve never seen anything like the last five months” in terms of the frequency of generous dividend hikes. “Dividends have exploded to the upside.”

He points to fresh announcements of double-digit percentage dividend increases by Caterpillar Inc. (CAT), Target Corp. (TGT) and Texas Instruments Inc. (TXN). While none of those stocks carries a particularly gaudy yield – each in the 2% to 3% range – their management teams’ commitment to lifting payouts accrues to shareholders’ benefit over time.

Even some of the most obvious yield plays in the market have rewarded patient investors. AT&T Corp. (T), the classic widow-and-orphan name with its 5.1% yield, has raised its payout 28 years straight. “Even I didn’t realize that,” Cohen says. Wall Street is pretty cool on the stock, with only eight of 34 analysts recommending a Buy, and Cohen grants the “warts” on the company’s fundamentals, including nasty price competition. Yet with a fat yield and good odds of a rising dividend stream covered by free cash flow, it’s hard to go terribly wrong, Cohen suggests.
And for yield-hungry investors, “I don’t know what a better alternative would be” to dividend-rich stocks, he says. High-yield bonds rallied to unattractively low yields and have recently been rattled by rising-rate fears, and “there is no value in Treasuries right now.”

Don’t confuse Cohen’s view on the virtues of dividends with a prediction that the heady outperformance by higher-yielding stocks - which led the market to new highs in the early months of this year - is sure to continue.

He bristles at the concept of “the dividend trade” as a hot-money, performance-chasing phenomenon. “I think the word ‘trade’ might lead people to think about dividends in the wrong way. To me, dividends are not a trade. Dividends and dividend growth are a ten, 20, 30-year program people ought to be thinking about,” Cohen insists. “If people think they are going to get bullish on dividend stocks after they’ve gone up and get upset when the market corrects as it is now, they’ll never make money, never get the compounding effect.”

Certain pure-yield segments of the market certainly were run to frothy levels in the mad yield chase as investors got overconfident that Treasury yields would stay ankle-high. Real estate investment trusts, master limited partnerships and preferred stocks have fit this description, and yield-hog investors here have been punished harshly in recent weeks.

Yet, to Cohen, talk of a “dividend bubble” is hogwash.

“The belief system is not in place that dividend stocks can only go up,” he points out, the way the public felt about technology stocks in.

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