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Investing Specialists

Is Dividend Investing Broken?

Dividends retain their appeal, even if they can't stop stock prices from falling.

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Dividend-seekers like me tend not to swing for the fences. I don't need to double my money in the next 12 months. If I can collect nice yields between 3% and 7% from my stocks, I'd be satisfied with annual total returns in the 9%-13% range. And with modest expectations, the risks should be modest, too.

Yet this has been a miserable bear market for dividend investors, and high-profile tragedies like  Citigroup (C) and  Wachovia (WB) are just the beginning. Dozens of companies, large and small, have slashed or eliminated their dividends in the past year, depriving investors of billions of dollars in annual income. The Morningstar Dividend Leaders Index, which tracks the returns of 100 high-yield stocks, has lost nearly a third of its value since its May 2007 peak (even with dividends included)--more than double the loss borne by the S&P 500. And as far as I can tell, no meaningful segment of the high-yield equity universe has been immune from falling prices.

This begs a good question: Is dividend investing broken?

Josh Peters, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.