Starved for Yield? Stock up.

Last Updated Jan 12, 2010 10:14 AM EST

Getting income out of bonds remains a tough slog. We're still waiting for Ben Bernanke to take his foot off the Fed Funds rate so we can earn more than 1 percent on short-term debt. But even if you venture out past five years on the Treasury yield curve, you're still looking at less than a 3 percent yield. Stick your neck out to a 30-year maturity and you lock in a yield of just 4.3 percent; when weighed against the inevitability that rates must rise to address the massive federal deficit, that seems like paltry recompense for the maturity risk.

Dividend to a Means If you're looking for income in today's market now is an especially smart time to shift your glance entirely out of fixed income and think about adding some solid dividend-paying stocks to your portfolio to generate income.

The challenge is finding steady dividend payers. Last year was flat out ugly in dividend land. Howard Silverblatt of Standard & Poor's recently told AOL Daily Finance a record 800+ companies slashed their dividend last year, reducing payouts by roughly $58 billion.

The good news is that Silverblatt expects the worst is over. Companies that needed to slash their payouts got that painful work out of the way in 2009. Unless we get a double dip back into recession, the expectation is that we may actually see dividend increases start creeping back into the news by the end of the year.

And what's intriguing right now is that you can pick up quality stocks with dividends that surpass the payout on a 5-year or 10-year Treasury. It's a point that PIMCO's Bill Gross made in his December investment outlook. Gross made a case for looking at utility stocks for income. With yields north of 5%, and slow but steady earnings growth you get a nice income payout without taking on a ton of equity risk. (Utilities are typically the least volatile segment of the market.) For example, Consolidated Edison (CE) has a 5.2 percent yield. Even better it is on S&P's elite list of Dividend Aristocrats: firms that have managed to increase their dividend payout for at least 25 years. You can also check out Morningstar's recommended utility stocks.
If you expect you'll want to cash in any of your principal investment any time in the next 10 years, stocks aren't ideal. But if you've still got a long-term horizon (and retirees should, with average life expectancy for today's 65-year-olds pushing 20 years) leaning on stocks to generate income makes a lot of sense.