Dividend Mastery

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I love dividends, and I loved dividends before they were cool. All these Johnny-come-lately dividend investors are all just aping my style... except that they're probably doing something completely different.  I'm going to share what I do when I'm looking to master my dividends and get a steady dividend paycheck that I can (partially) live off of. Easy? No. Gut-wrenching? Occasionally. Fun? Hell yeah. Let's look at a few yummies.

The first thing I do is look for solid profits and a large dividend. Then I consider the factors that could cause the company to fail and think about how likely that actually is. 

Armour Residential REIT (NYSE: ARR) is not the kind of company I'd normally invest in. I pretty much swore off mortgage-backed securities when I realized that banks were just selling them and had no commitment to making them into proper investments. However, the 72% profit margin, the PEG ratio of .61 and the dividend yield of 15.3% do a lot to sway me. Added to these tasty features is the fact that Armour was started by Marc Bell, who has his hand in a lot of successful businesses. With fat profit margins and a major shareholder with serious chops, this might be worth looking into further.

Cellcom Israe(NYSE: CEL) has the obvious disadvantage of obviously being from Israel. Make your own joke about miracles, but Cellcom doesn't seem to need one. For starters, this company started as a hungry upstart and went from nothing to dominance in only a few years. They debuted the first Hebrew language cell phone menu and brought Israel its first video conference call. This spirit of innovation couples with a 5.89 P/E ratio, a .85 PEG ratio, and a nice little 11.6% dividend yield to make this company a contender for my dividend stable. It's neat to think that every time someone gets a phone on the other side of the world, I'll make a little profit. I have to admit that there is the problem of having very little moat here. Cellcom competes primarily on being the first to try new things and on price. While this is a successful strategy so far, the Ministry of Communications could shut them down tomorrow for any reason. And someone can always go cheaper.

I like IRSA Investments and Representations (NYSE: IRS) because it's Argentinian. Argentina is a reasonably stable country, and I love international investments. On top of that, I understand the basic business model that IRSA uses because I also develop and rent out properties. On the surface I do like the 16.6% profit margins, the 7.12 P/E ratio and the .41 PEG, not to mention the 10.3% dividend yield. But I need to be careful about becoming under-diversified in real estate, so let's leave the land behind.

Safe Bulkers (NYSE: SB) ships dry bulk across the oceans. With 13 new ships and plenty of commodities that need constant shipping, Safe Bulkers has a pretty straightforward business model that I can appreciate. Of course, there are some down sides here. While there are 49% profit margins here, the 4.71 P/E ratio could be a sign that investor confidence isn't favoring Safe Bulkers' relative lack of growth for its industry. I'm all for being contrarian, especially with a 10.7% dividend yield, but without steady growth the company could be looking at a slow and painful death.

The most important thing to do is make sure you understand how the business pays the dividend. If you don't know that, you won't be able to gauge the likelihood that the dividend will keep getting paid. If you want to master dividends, be prepared to do a lot of digging and don't be afraid to find a lot of mediocrity.


pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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