The Quest for Great Dividends

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

As I write this, I'm thinking through "Hunting High and Low" by Stratovarius. It's a good song and worth looking up, but that's not why we're here. We're on a quest to find companies that pay a great dividend and are likely to do so for awhile. I still hold the dream of living only on my dividends and having them pay for my entire lifestyle. Nobody said it'd be easy and it'll undoubtedly carry some costs. This time I'm going to take a different strategy for me and open up to lower-paying companies. As much as I love dividends in the 10%+ range, there's risk involved in that strategy. So let's see what I can find, and then whether it's any good or not.

Corpbanca Sponsor (NYSE: BCA) is a retail and commercial bank with its fingers in a lot of pies in Chile. While its dividend yield of 4.7% doesn't really make my mouth water, it's a lot better than a savings account. I like that Corpbanca has been in continuous operation since 1871 and has had some earnings growth over the past 5 years. The return on equity is a nice 20%, which means they're keeping it tight. But my favorite part of Corpbanca is the 44% profit margins. I have a feeling they could raise the dividend safely if they wanted to, and that's a good decision to be in position to make. This warrants more research.

Terra Nitrogen (NYSE: TNH) is great because it's positioned to be a major part of increasing the food supply. Without fertilizer, food would rapidly become too expensive for most people, so this is an industry with something of a moat built in. I love the 197% return on equity, but that's more nominal for a company that deals with a commodity. I was pleasantly surprised to see that Terra pays a handsome 10.7% dividend, and equally pleased that it carries 35.7% profit margins and has grown more than 43% over the past 5 years. I don't like the high share price, nor the fact that most of Terra's offerings come down to commodities that could (at least in theory) be easily underbid by a hungry competitor. I'm also not too keen on the fact that Terra isn't very geographically diversified, having its only manufacturing plant in Oklahoma. On top of that, as a master limited partnership Terra imposes a fairly high tax rate on the dividends it pays. 10% can quickly become more like 5% under those conditions.

BHP Billiton (NYSE: BHP) carries a 2.5% dividend that I respect because it deals efficiently with mining and petroleum. I like BHP because they carry a 38.3% return on equity and a 12.36 P/E ratio that makes it look good. With BHP's 30.5% profit margin, it looks like the the dividend has no problem getting paid. My favorite part of BHP is the fact that it's grown 103.33% over the past 5 years. It's a hungry company! Unfortunately, BHP carries the negative effect of being British and Australian. Now I have no problem with these countries, mind you, but as an American there's a big deal regarding the currency exchange rates and the potential headaches of withholding for international income taxes.

Philip Morris International (NYSE: PM) kind of surprised me. I already knew it pays a 4.5% dividend and has ample international exposure. But despite the fact that I hate cigarettes and companies with a 17 P/E ratio (I'm stuck on <10), I can't argue with a company that has grown its $142 billion market cap 13% over the past 5 years, carries some incredibly successful brands and has a 178% return on equity. That ROE is the highest I've seen so far that wasn't a commodity producer, a mine or an oil company. However, I do have to express some concern about a company that unapologetically kills its customers, and the 27% profit margin seems a bit small for such a well-established company.

The companies in this group seem a bit more solid than some of my more speculative ideas, but I'd urge you to  research them thoroughly before you plunk down your money. Dividends can keep going for a lifetime, so it's worth taking a few hours to research the companies first.

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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