How To Find Good Dividend Paying Stocks

| July 13, 2009

Longtime readers know I’m a big proponent of investing for yield.  I love it when a stock pays me money quarter after quarter.  I love nothing better than to see those dividend checks rolling in.

I’ve even recommended a few stocks in this very publication that have great yields.

Honestly, some have done better than others.  This got me thinking.  Are dividend stocks really the way to go?  A lot of investors are blindly throwing money at any stock paying a dividend.  Are they hurting themselves?

So I did a little research, and what I found will shock you… I was floored by the data.

I decided to take a quick look at the overall market.  Then I compared that performance to the performance of high dividend yielding stocks.

Dow Jones publishes a list of dividend yielders called the Dow Jones Select Dividend Index.  The ETF that tracks this index is traded under the ticker symbol DVY.

Now, keep in mind these dividend selections are far from equally weighted.  More than 50% of the entire index hails from two industry groups, Industrial Materials and Utilities.

Some say a picture is worth a thousand words… this one could be worth thousands of dollars.

Year to date, the S&P 500 Index (SPY) is down a little over 5%.  On the other hand, the dividend basket of companies is showing a loss of almost 15%!

The SPY’s dividend yield is 2.7%, while DVY has a yield of 5.5%.  Relying on dividend yield to close that kind of performance gap is going to be really tough.

So we should just ignore dividends, right?

I say not so fast.

See, the numbers above are leaving out one important fact.  Certain high dividend yielding stocks are actually outperforming the market as a whole.

Just look at companies like Clorox (CLX), Eastman Chemical (EMN), FPL Group (FPL), and Watsco (WSO).  They’ve all outperformed the S&P 500 this year… some by 15% or more!

This tells you one thing loud and clear.

You need to be very selective in the stocks you pick, particularly when you’re investing for dividend yield.  It can’t be the only thing you focus on.

What else should you be looking for?

Here are three things I always look at when researching a dividend yielding investment:

Are the financial statements strong?

Ask yourself, does this company have enough cash on hand to make these dividend payments?  Also check and see if the company is generating strong cash flow.  If their cash flow numbers are looking weak, then the dividend is clearly in jeopardy.

Is the debt level manageable?

While you’re glancing at the financial statements, go ahead and check out the company debt levels.  If they’re crazy big, or if you see a big slug of debt coming due soon, watch out… that might call for a cut to the dividend.

What’s the company dividend history?

This part of the analysis is all about reputation.  If a company’s been paying dividends for decades or centuries, management wont’ be so quick to cut a dividend.

Occasionally it still happens, but often for good reason.

Companies just starting to make dividend payments are less likely to see the dividend as a sacred cow… something to save from the slaughter.

Right now an interesting industry dynamic is shaping up.

Dividend stocks are underperforming the overall market.  This tells us careful selection of individual stocks is all the more important.

When investing in dividend stocks, be selective, and at the very least, follow my three suggestions for researching great dividend stocks.  Above all, remember, don’t focus solely on dividends when making investments.

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Category: Dividend Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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