Veteran money manager Dick Dahlberg has some advice about where to find companies that are likely to increase their dividends this year: Forget about beleaguered banks and focus on telecommunications firms, health-care companies, stalwart consumer brands and other cash-rich businesses that are positioned to reward shareholders in a constrained economic and stock market environment.

"Over the next year, banks will have difficulty increasing their dividends, but other companies will pick up some of the slack," says the 68-year-old co-manager of the Columbia Dividend Income Fund.

Dahlberg says that because financials account for over one-fourth of all dividend-paying companies, the overall rate of dividend increases in 2008 is likely to fall behind levels for the previous three years. "In 2007, we saw a low-double-digit rate of increase in dividend payments," he says. "This year, I suspect that the lack of boosts by financials will bring that number down to somewhere in the mid-single digits."

The slowdown in dividends Dahlberg and others see ahead began quietly in 2007, when only 1,857 of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor's Dividend Record increased their dividends, which represented a 5.7% decrease from the 1,969 issues that raised their dividends in 2006. For the fourth quarter of 2007, dividend increases declined 10.6% to 432 from the 483 recorded during the fourth quarter of 2006.

Meanwhile, dividend decreases and suspensions picked up in 2007 amid the difficulties within the financial and consumer discretionary sectors. The current trend of companies favoring stock buybacks instead of making a long-term cash commitment to dividends has also contributed to the dividend drop.

Among the more publicized casualties this year has been bond insurer MBIA, which slashed its dividend by 62% in January amid concerns about a downgrade by credit-rating services. Last year, Washington Mutual cut its payment by over two-thirds to shore up its capital position. In December, the board of National City Corp., a bank that was hit hard by the subprime mortgage crisis, voted to cut its quarterly dividend in half.

The Columbia Dividend fund's 51-year-old co-manager Scott Davis says he and Dahlberg saw the cloud over National City coming earlier in the year when they decided to remove the stock from the fund's portfolio. "There were a lot of bad signs. Managers were buying back stock at very high prices and making costly acquisitions," he says.

National City joins the growing ranks of firms choosing stock buybacks over dividend payments. According to Standard & Poor's, companies in the S&P 500 index have spent more than twice as much on buybacks as they have on dividends over the last three years. Dahlberg says such activity is often a sign of management overconfidence and greed rather than a company selling at a bargain price.

"Many of the banks whose stocks have lost a third or more of their value were doing buybacks at very high prices last year," he says. "Companies often overestimate their prospects, and managers have a built-in incentive to conduct buybacks when their bonus and stock option compensation is based on how well a stock does. Buybacks aren't necessarily a bad thing, but they have to be done judiciously."

Dahlberg, who came out of retirement in 2003 to help manage the fund and who has been in the investment business for over 40 years, is also skeptical about stock options and acquisitions. He says the former are "a good way to dilute earnings and transfer wealth from shareholders to management," while acquisitions often result in badly matched corporate marriages and overpayment.

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