These Are Dividends You Can Count On!

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

In the current artificially depressed interest rate environment that we live in, it's crucial to search for assets that can produce satisfactory returns. Dividend payouts represent a relatively reliable source of income to investors. But not all dividends were created equal. Some have a big question mark hanging above them while some are as reliable as death and taxes. It's extremely important you know how to distinguish between the two groups.

What to look for in dividends

The following are the 3 most important criteria when it comes to dividend selection:

Criteria #1: Payout ratio

The payout ratio tells you what portion of the net income of the company is being distributed back to shareholders in the form of dividends. If the ratio is too high, it's a warning sign that if things turn for the worse, your dividends are in danger of being eliminated. On the other hand, too low a ratio means that the company isn't too thrilled to compensate you, the shareholder, for your trust and patience. My rule of thumb is that a payout ratio between 30% and 70% represents a good and healthy payout.

Criteria #2: Dividend yield

A dividend yield is the dollar amount distributed per share divided by the current price of share. If the yield is too low, it's not that attractive because you are earning less on each dollar you invest. On the other hand, too high a yield may pose some risk. Extremely high dividend yields often precede a collapse in the business. I usually like to see yields between 3% - 7%, depending on the industry.

Criteria #3: Dividend growth

It's always nice to know that your annual dividend payout has increased year-over-year. This indicates a healthy business and assures that you will never lose your money to inflation. I like to see my dividends increase at a minimum rate of 5% per annum.

My favorite dividend picks

In today's market, the following 3 companies stand out as exceptional candidates in the dividend segment:

  1. Leggett & Platt (NYSE: LEG) manufactures metal wires, bed springs and other steel mechanisms. The company sports a healthy 3.8% dividend with a payout ratio of 67%. Leggett has quite a remarkable track record of dividend payouts. In fact, 2012 marked the 41st consecutive annual dividend increase for Leggett & Platt, with a compound annual growth rate of 13% over that period. You simply can't go too wrong here.
  2. Vectren (NYSE: VVC) is an energy holding company that delivers gas and electricity to more than 1 million utility customers in Indiana and Ohio, and offers other energy-related products and services. The stock is currently brushing its 52-week high, offers a 4.7% dividend yield, with a 70% payout ratio. Such a high payout ratio is very typical among utility stocks. Vectren has been rewarding shareholders with dividend hikes for over 53 (!) years.
  3. AT&T (NYSE: T) provides telephone and broadband service. The $200 billion gorilla is one of the famous dividend aristocrats out there. And it definitely deserves the status. With a dividend yield of 5.1% and a track record of growing its payouts for over 29 years, the company stands out as truly stable and reliable.

Looking ahead for dividends

When it comes to dividends, you don't want surprises. You need to pick the most reliable and steady companies out there that have a long proven track record of increasing your payouts each and every year. That is the true path for riches.

shmulikarpf has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus