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Friday, July 10, 2009
Dan Caplinger :: Townhall.com Columnist
6 Dividend Stocks You Can Depend On
by Dan Caplinger
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Lately, trying to find good dividend stocks has been like walking in a minefield. You never know when the next dividend blowup is going to do some serious damage to your portfolio.

Avoiding stocks that will end up surprising you by cutting their attractive dividends isn't the easiest thing in the world. Even companies like Dow Chemical (NYSE: DOW) and General Electric , which were dependable dividend payers for decades, have cut their dividends recently.

Protect yourself
As vulnerable as many companies may seem to potential dividend cuts, there are still several characteristics you can look for to indicate whether a future cut is likely. Let's take a look at them:

Healthy payout ratios. When a company pays out all of its profits to investors through dividends, it doesn't give itself much wiggle-room if its financial results go sour for a year or two. Conversely, companies that keep much of their earnings in reserve -- either to plow back into their businesses or to invest in other opportunities -- have more flexibility to deal with temporary setbacks without putting their shareholders at risk. These are the companies to identify.Dividend yields in the sweet spot. The adage that bulls make money but pigs get slaughtered often applies to dividend investors as well. Obviously, higher yields look more attractive to investors seeking income from their portfolios. But when yields get too high, they can become unsustainable, and eventually, the inevitable cut will hurt shareholders.Good dividend histories. As we've seen recently with GE, just because a company has a long history of increasing dividends doesn't mean it won't cut payouts when times get tough. But in general, a company that has the ability to put together a long string of dividend growth will work harder to maintain its stature than companies that haven't demonstrated that same level of dividend commitment in the past.Attractive valuations. Valuation may not seem very important as a sign of dividend health. But high valuations that aren't supported by corresponding growth can signal trouble ahead. If share prices then fall in response to that trouble, a past dividend that rose with the stock price can prove to have been too ambitious.

Depending on exactly what parameters you set for each of these characteristics, you'll come up with different results. But by combining extremely low payout ratios, dividend yields between 3% and 5%, P/E ratios in the mid-teens or below, and a history of increasing dividends for at least 10 consecutive years, I came up with several promising stocks, including the following:

Stock

Payout Ratio

Dividend Yield

P/E Ratio

Consecutive Dividend Increases

Procter & Gamble (NYSE: PG)

37%

3.4%

12.0

55 years

United Technologies (NYSE: UTX)

31%

3.1%

10.6

15 years

Abbott Labs (NYSE: ABT)

42%

3.5%

13.1

36 years

McDonald's (NYSE: MCD)

46%

3.5% Continued...
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About The Author

Dan Caplinger is a contract writer for The Motley Fool.

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