Now's the Time to Double Down on Dividends

Yes, you read that headline correctly. In the midst of perhaps the worst year for dividend investors in more than a generation, I'm telling you that now's the time to double down on dividend stocks. Allow me to explain.

A tough pill to swallow
While dividend payers have long been thought of as safe ports in stormy markets, this year has been a notable exception.

Thirty-six members of the S&P 500 have cut or eliminated their dividends this year, among them Bank of America (NYSE: BAC  ) and Wachovia (NYSE: WB  ) . Financials in particular, thought by many to be defensive staples in dividend-based portfolios, slashed dividends to the tune of $35 billion in the first half of 2008. Other companies, like Carnival, have opted to suspend their dividend payouts to shore up capital until things turn around.

With glum news like this, dividend-paying stocks look like more of a gamble than ever. But while no dividend -- or stock -- is 100% guaranteed, this particular stormy market is providing some great opportunities to buy strong, well-capitalized companies with high dividend yields -- at lower prices.

Here's how to find them
All dividend payers are not created equal, and you want to find the ones that have the businesses to back up their payments. Strong businesses will maintain or even increase their dividends, even in a market like this one. Just look at Kraft and Philip Morris International for examples.

So how do you tell if a business is strong? Many people use the earnings payout ratio (dividends per share / earnings per share), but those numbers aren't always reliable because a company can strategically adjust net income for any number of reasons.

Rather, focus on the free cash flow payout ratio. It's much more difficult to fake the cash flow, and that means investors can have more confidence in it as a measure of dividend health.

Ideally, you want to find companies with free cash flow payout ratios below 80%, which demonstrates that the company has an adequate cash cushion to maintain its dividend payments -- and even raise them.

In fact, of the 207 S&P 500 members with dividend yields over 3%, 90 of them (43%) have free cash flow payouts below 80%. Here are just a few of them:


Dividend Yield on Nov. 12, 2007

Dividend Yield on Nov. 12, 2008

Levered FCF Payout Ratio

Johnson & Johnson (NYSE: JNJ  )




Home Depot (NYSE: HD  )




Intel (Nasdaq: INTC  )




Valero Energy (NYSE: VLO  )




Freeport-McMoRan (NYSE: FCX  )




Source: Capital IQ, a division of Standard & Poor's, as of Nov. 12, 2008.

Because of the market turmoil, you can get much higher yields today than you could just a year ago; while the companies' stock prices have declined, their ability to pay dividends appears unchanged. In fact, with the exception of Home Depot, each of these stocks has actually increased its dividend in 2008.

The combination of lower prices, higher yields, and a sustainable dividend is one you definitely want to research further.

But spread your bets
It's important to keep in mind that no individual company, however strong, is immune to the kind of sectorwide disaster that brought down the banks this year -- even after many of them paid uninterrupted dividends for years. That's why diversification across sectors is so important, even if that means sacrificing a little yield.

This beaten-down market provides a great opportunity to build a high-yield portfolio made up of 10 to 15 stocks with well-protected dividends from different industries. With so many financially strong companies paying higher yields today, now's the time to double down on dividend stocks that have solid free cash flow coverage.

Good companies with well-covered dividend payouts are exactly what James Early and Andy Cross look for at our Motley Fool Income Investor service -- and they're finding plenty. If you'd like to see what they're recommending now, consider a 30-day free trial. You'll also see all of their past recommendations and their best bets for new money now. Just click here to get started. There's no obligation to subscribe.

Todd Wenning recently launched a second high-yield portfolio on Motley Fool CAPS, which you can follow by clicking here. He owns shares of Philip Morris International and Home Depot. Johnson & Johnson, Kraft, and Bank of America are Motley Fool Income Investor selections. Intel and Home Depot are Inside Value recommendations. The Fool owns shares of Intel and wrote covered calls on it. The Fool's disclosure policy prepared for its Thanksgiving feast by purchasing jeans two sizes larger than normal.

Read/Post Comments (41) | Recommend This Article (190)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2008, at 5:03 PM, raference1 wrote:

    Agreed on dividends. But - I've read numerous articles in the past two weeks telling me what I should buy. What do I sell to generate the cash?

  • Report this Comment On November 13, 2008, at 5:07 PM, keddie1 wrote:

    What to sell? - Excellent Question.... will the fool please do an article on exactly this point!!!!

  • Report this Comment On November 13, 2008, at 9:27 PM, ReillyDiefenbach wrote:

    What to sell? Everything, last November.

  • Report this Comment On November 13, 2008, at 10:47 PM, bluebird4 wrote:

    Help! Which kinds of stocks should one move to a Roth to satisfy the RMD?Don't have to sell this year but still are taxed on what we move over.

  • Report this Comment On November 14, 2008, at 7:16 AM, wuff3t wrote:

    "What do I sell to generate the cash?"

    I think that question is a little unfair on TMF. They don't know what stocks - if any - you already own.

  • Report this Comment On November 14, 2008, at 9:18 AM, roxanne88 wrote:

    I am with jglover323 and keddie1. More answers please, and less promo of ways to buy more answers... Thanks!

  • Report this Comment On November 14, 2008, at 10:12 AM, Slobberdoggy wrote:

    Anybody know where I can find a list of s&p stocks that have had their dividends eliminated? BAC has *cut* their dividend but they offer a fat yield at todays prices.

  • Report this Comment On November 15, 2008, at 2:26 AM, courtneTHEgreat wrote:

    WOW.... What to sell?? The answer is clear! Sell whatever will be hit by this recession crisis! IBM is good, but will go down. Walmart is good, but will go down. Macys is good, but down it will go... Down goes Home Depot and Bank of America. All have reasons to drop, and the reason is clear for everyone to see! Meds are good... Energy is good... We need them both! Just do some thinking and buy what WILL NOT be affected much. Look at Dollar General... It should have fallen like other stocks, but it is still hanging in there. WHY! It is at the bottom of the food chain! I will not go to Macys due to the recession.... so I stay home. But John shops at Dollar General.... Gas is low.... John is not into stocks.... He just wants to keep his job.... He continues to shop. Do not get me wrong, I will go to Dollar General, too.... but I will not buy a Mercedes in a Toyota market. Buy "Toyota." Oh, ...sell the "Mercedes," or hold it long! Understand? This will be a long ride.... Also remember, this economy is no one's mistake.... We have many Harvard graduates in high places and they KNEW this would happen.... Inflation and wage freeze... for years.... Do the math! (smile) -courtne-the-Great

  • Report this Comment On November 15, 2008, at 8:26 PM, DivHawk wrote:

    Great article! Sound theory on building portfolio of dividend/income paying stocks. One slight quibble perhaps. I would be willing to bet that Procter and Gamble is one company that can (and has) been immune to 'market disasters' - actually I think it's done this for the last 50+ years. Never seems to get recommended as a potential buy. Kind of curious as to why. Any comments, guesses?

  • Report this Comment On November 19, 2008, at 2:31 AM, haulinazz469 wrote:

    What to sell? Don't sell anything that you weren't already going to sell, or would have sold last November based on your own due diligence. Don't panic like the other sheep.

    As for me, I invest $300 a week out of each pay check into 12 carefully selected dividend paying stocks, with the dividends automatically re-invested (D.R.I.P.s). The same thing I've been doing for the last 4 years, when I got interested in investing, and found TMF (and other sources of information).

    I've lost about $17,000 in the last 3 months due to the market meltdown (or crash, or correction, depending on which talking head is speaking)....ON PAPER. But I haven't really lost anything, until I SELL for a LOSS. (I never DID understand taking a loss for a tax write off. It STILL sounds stupid to me)

    I still own just as many shares as I did 3 months ago (well, actually, more every week). Eventually, I'll make it all back, plus much more. In the meantime, when my dividends pay, and reinvest, I get more shares than I would have 3 months ago.

    It's called investing for the long haul, baby.

    If your a Day Trader, or Swing Trader (which I also do strictly for fun), your on the wrong website.

  • Report this Comment On November 21, 2008, at 12:44 PM, aguadaboca wrote:

    try GE! even if dividend gets cut(a smart move to build cash) to %50 you're still earning $0.64 a share or close to 5 %. And yes, their financial arm will be taking a big writeoff soon, I belive this is reflected in the $13.00 price.

  • Report this Comment On November 21, 2008, at 4:04 PM, gtechie wrote:

    Whaddya think of SWDIX to cover the dividend stocks? I get hit with a hefty trading fee, so I try to stay in funds instead of guessing on stocks.

  • Report this Comment On November 21, 2008, at 4:17 PM, gmh29 wrote:

    Take a look at AFLAC. Strong capitalization,

    $1.12 (3.12%) Dividend. Selling an almost recession-proof product, here in US as well as in Japan. P/E 10.20. Very conservative investments. EPS $2.97 with continued growth in sales through the 3rd Qtr '08 report. Took a small hit with the fall of Lehman Bros, but still profitable....which says a lot in itself.

    I've doubled my holdings here with a buy near its 52 week low.

  • Report this Comment On November 21, 2008, at 4:21 PM, anteater70 wrote:

    > I've lost about $17,000 ON PAPER. But I haven't really lost anything, until I SELL for a LOSS.

    IF you think you haven't lost anything, you're truly an imbecile. Read your balance statement. THAT is what you have. The $17,000 is GONE. Do you understand? It is not there. That is why the number is lower. It doesn't MATTER if you sell or hold. The balance stays the same. You are entitled to nothing except what you have RIGHT NOW. How can I make this more clear?

  • Report this Comment On November 21, 2008, at 4:30 PM, jhatlarge wrote:

    Ask the MDP portfolio what to sell.... their picks went through the floor... As the Fool? What a silly idea.

  • Report this Comment On November 21, 2008, at 4:32 PM, Musasabi wrote:

    Sell low and you can make the paper loss feel more real.

  • Report this Comment On November 21, 2008, at 4:40 PM, gmh29 wrote:

    haulinazz469 is 100%'s only a paper loss until you sell, then it becomes a capital loss. If you're in it for the long haul, sit back, buy in, ride it out and watch investors like him smile when the rebound happens...and it will.

  • Report this Comment On November 21, 2008, at 4:58 PM, jleh01 wrote:

    Everyone is running from the big banks, but what about the smaller "hometown" banks? I've been collecting Harleysville National Bank (hnbc) who has been doing well with a .80/share dividend. Stock price sank a little but financially they look strong.

  • Report this Comment On November 21, 2008, at 5:21 PM, SpecOpsGuy10 wrote:

    For the folks who wanted to know where to find high FCP companies, a good place to start might be The Magic site (it's the corollary to The Little Book That Beats the Market); look for companies with 100% probablity of highest payouts. This is not an ad, tho I've used their method with some success. Nobody's got the magic key (look at Warren B), but it's a good place to start research.

  • Report this Comment On November 21, 2008, at 5:29 PM, SpecOpsGuy10 wrote:

    gmh29 got it right on the money!! I had AFLAC, had made 200% (on paper), kept foolishly holding it, rode it down to 100% profit and sold. When it's lost just a bit more when the DJIA hits a smidge below 7000, I'm buying back in BIG TIME. Morningstar 5-star, huge cash reserves, solid business model, solid company, just hammered by the current panic.

  • Report this Comment On November 21, 2008, at 6:48 PM, griffonwc wrote:

    For those who want a list of good dividend companies, you can start

    by looking at the Mergent's Dividend Achievers website:

  • Report this Comment On November 21, 2008, at 6:49 PM, tommybitt wrote:


    N O T H I N G that will create a substantial loss. Hold on until August 2011 when the market stabilizes

  • Report this Comment On November 21, 2008, at 7:01 PM, tommybitt wrote:

    to anteater70 who said...

    >>"IF you think you haven't lost anything, you're truly an imbecile. Read your balance statement. THAT is what you have. The $17,000 is GONE. Do you understand? It is not there. That is why the number is lower. It doesn't MATTER if you sell or hold. The balance stays the same. You are entitled to nothing except what you have RIGHT NOW. How can I make this more clear?">>

    It certainly does matter. He/she sells now = Big loss.

    He/she holds on until the market rebounds (albeit a year or two) = make back the paper loss.

    Your an imbecile for saying ..."the balance stays the same"

    What does that mean??? If you hold, not sell, the balance will increase as the market improves.

    Did I miss something?

  • Report this Comment On November 21, 2008, at 7:09 PM, bluedome wrote:

    >> watch investors like him smile when the rebound happens...and it will.

    That's what they said about Japan after that market crashed in 1991. It STILL has not recovered. In fact, it is at about 1/4 of the 1991 price right now.

    Not to be pessimistic or anything...;-)

  • Report this Comment On November 21, 2008, at 7:14 PM, ellielu wrote:

    I need help! My school district has just informed us that beginning on Jan. 1 we have to start putting all our 403b money with ING instead of the providers that we have been using (I have been with American Century and will leave my current investments with them alone). I know nothing about ING and have no idea given what is going on the the markets today what I should do. I get paid once a month, so $1200 goes in my 403b each month. I am 56 years old. Teach me what to do please!

  • Report this Comment On November 21, 2008, at 7:26 PM, chuck245 wrote:

    courtne the Harvard graduates have been running the government and most of the financials which have driven us straight into the CRAPPER

  • Report this Comment On November 21, 2008, at 8:55 PM, banjoart wrote:

    I know the value of owning stocks that pay healthy dividends. So what does "double down mean".

  • Report this Comment On November 21, 2008, at 9:05 PM, Bobagedon wrote:

    Hmm, asking for advice in this section is a bit like asking for directions from a hitchhiker. IF you are a subscriber, then, you are given advice as to which stocks to hold or sell. It's your choice on whether or not to follow this advice. If you don't have stocks you should sell, then, its time to pony up new money. The stock market, like most investments, is a gamble. Never gamble what you can't afford to lose. A penny saved is a penny earned? Myself: I have faith this economy will turn around. We just might have to wait five or so years. I'm betting ten percent of my earnings on this every week. I may be wrong, but if I am.......well the world is supposed to end in 2012 anyway................

  • Report this Comment On November 21, 2008, at 10:11 PM, courtneTHEgreat wrote:

    chuck245, RIGHT! The Harvard grads planned this market. They KNEW this would happen. Only a fool would think $4.00 gas would be invisable to the economy... ARM mortage to people trying to pay rent and not looking to the adjustment and how to handle it.... Auto industry with unions driving up the price and reducing the quality. Yep, Harvard grads... and President Bush knew what he was doing, too. It is just that what they did hurts me financially.

  • Report this Comment On November 21, 2008, at 10:23 PM, boedink wrote:

    Response to is one of the best websites to get an education, build and test portfolio options..get good evaluations of stocks, bond funds, mutual funds, ETFs etc. Costs about $18/mo. but if you cannot make $18 a month off of their excellent analysis then shop elsewhere. I attended a couple of $500 seminars and I have picked up much more at than weekend quik-educ. I learned most of my stuff at is an excellent website, good educational material and is most of the stuff is free!

  • Report this Comment On November 22, 2008, at 4:46 PM, jaaboo wrote:

    Many little bits and pieces provided by investors with many different points of view. Thank you all. Pick and choose from these ideas carefully and understand that the economy is huge, driven by literally millions of small business owners. Some of the big guys will fail because they have been ignoring some common sense indicators. I feel sorry for their employees. History teaches us all we need to know. The cycles will continue. Take advantage of this down cycle. I have a little book in my library "Dow 3000" (by Blamer and Schulman copyright date 1982). At that time the Dow at 3000 was considered outrageous. I bought GE then and am back to buying it now. At $13 how can you go wrong?

  • Report this Comment On November 22, 2008, at 5:04 PM, Deibster wrote:

    Bristol Myers BMY, is paying over 6%. NIF, Nuveen Insured Muni. Fund is paying over 6% tax free & selling below Net Asset Value, so it will go up when the market recovers - whenever that is. ERF, HTE & PWE are all energy trusts that get preferential tax treatment and are all paying over 20% now that the stock price has come down. Just some ideas to check out; remember to Diversify.

    A gain is just a "paper gain" until you sell. Likewise a loss is just a "Paper Loss" until you sell. If at all possible, hold onto good companies for another year to see if your stocks recover their previous values. If they are bad companies, you may want to get out & get into something with better management and/or a dividend. Happy Thanksgiving & Good Investing!

  • Report this Comment On November 22, 2008, at 7:59 PM, rxal20 wrote:

    How do you calculate the free cash flow %?

  • Report this Comment On November 22, 2008, at 11:54 PM, stephen706 wrote:

    No one has even mentioned a true cash grower and consistent dividend payer--and that is WWE, paying $1.44 annually or 0.36 quarterly. Continuing to dominate TV ratings, selling out their shows, PPVs are sold-out and well-viewed. But it is professional wrestling and not a golden business. Definitely contrarian but the financials speak for themself.

  • Report this Comment On November 23, 2008, at 1:34 PM, basicecon wrote:

    The first point I would make is if you can't afford to lose it, you shouldn't be playin' with the market.During the boom of technology in the 90's and the mortgage driven boom of the early 21st century, people lost sight of that.

    Second comment is this article is much about dividend yields, which can be changed at a vote of the Board of Directors that we may not find out about for months.

    Look and learn from history - during the seventies, the average P/E ratio averaged 7 to 1. There were years when it was 5 to 1! It's now about twice that - the last figure I had was 10.7 - 1 a few weeks back. And remember that this is not factoring the results from the current months of recession, which will lead earnings and stocks down further, IMHO. "Shares crash, hopes are dashed, people forget," as Pete Townshend sang in Emminence Front.

    My conclusion is that if you are able to save money in the short term, do it in cash, as I expect this market has a lot more pulling it down than bringing it back up. You may miss the bottom of the market (my guess is between DJIA 3000 and 4000), but yields could even be higher then.

    If you own stocks, look at the companies who have essential products. Gas, food, medicine and insurance are examples. These will be needed if we go into a depression or a recession or boom times. Aviation stocks, technology, entertainment and restaurant chains will be hit badly if we have a recession; catastrophically if we have a depression. Stay clear of them.

  • Report this Comment On November 23, 2008, at 3:18 PM, journeywithme wrote:

    I hear of so many people who are selling like crazy in hope to salvage some on their investments.

    But, I wonder, should we be asking a few questions before we make the decision to sell?

    Like; how do I evaluate the businesses that I own to determine how they will fair during this global economic crises? What is the financial strength of this business today? What are the short and long term strategic goals for this business? How will the current economy and proposed economic plans impact the business' ability to reach those goals? How has this business been adapting itself to survive this economic crisis? What's management saying and doing in response to the drop in share value?

    Although I am new on my investment journey; isn't difficult to make a sound decision to sell without knowing at least some of the answers to these questions as they relate to the underlying businesses of the stock?

    Be well.

  • Report this Comment On November 23, 2008, at 8:54 PM, Ladyann12 wrote:

    I just printed the Fool's advise: You can still do it! Rebuilding Wealth After the Crisis.

    It gave me the courage and ambition to drop everything that didn't have a positive position in my portfolio. I have been floundering and doing nothing until now. For the first time since the "crash" I have started to feel in control. Try it. It only take a few minutes to decide whether you want the easy answers or the educated ones. The answer to free cash flow is also in that advise.

  • Report this Comment On November 29, 2008, at 4:30 PM, Beartracks1 wrote:

    I'm not the brightest light, but I'm purging some of my dying Mutual Funds, and buying some risky things like GE,MO, and LINN. It's in my IRA so that doesn't seem to be a problem for me. They might even grow a little. (Just one solution to where does the extra money come from to invest) The funds have been ok but lagging the mkt for years.

  • Report this Comment On December 16, 2008, at 12:18 AM, jerseyjac wrote:

    the answer to where to get the money necessary to invest in dividend stocks,I have been using a strategy that works in good markets and bad it is simple and for the novice or sophisticated investor.there are many layers of benefit including tax benefits.for simplicity use a $25 stock write a covered callwith a strike price of 10% or greater with an expiration into the next year or year after(note-january expiraton qualify for 15% tax treatment) the longer the expiration the greater the preminum you are factors and volitility will determine but in my example a strike price of $27.50 would be minimum.this will generate a premium of $2.50 plus time value(2009 or 2010) if for example 2009 you might receive $3.00.$300 per $100 shares for cash for dividend stock purchase(don'T forget to write a covered call on that stock immediately reducing you cost basis.If your stock approaches the strike price and you don:t want to sell your stock at strike price simply buy back(stock will move more than option),and rewrite option for strike price of $30,you must allow option to expire into next year for 15% tax rate.working example of this with dividend reinvestment can generate double digit div>EOS or EOI mutual funds although fund price is down reinvesting of monthly dividend would have given the investor an over all div yield in double digits and on an individual stock protection for downside movement of stock(the option sold goes down but you sold and can either buy back for profit or hold for expiration)this puts you in the unique position of being able to say market went up and i made money or the market went down and i made money---could make buy and hold reasonable again.I would urge learning this rather than asking a broker because 70%+or-- have no clue!!!

  • Report this Comment On February 28, 2009, at 3:29 PM, trythisntstupid wrote:

    Refusing to recognize an unrealized loss just because somebody else says so makes hauliazz469 anything but an imbecile. Makes him the smart one in my opinion. The imbecile considers unrealized losses real before they are. If you are a dividend investor that that thinks of common stocks as pieces of businesses rather than pieces of paper with volatile numbers then you haven't lost anything if

    The dividend you bought still seems secure

    The piece of the business you bought hasn't been diluted and you still own the same proportionate share of the business you bought and paid for.

    Just because it's cheaper now can be looked at as a stupid reason to sell it - especially if you are a dividend investor creating a high yield portfolio and never intended to sell it anyway. Might be a good reason to BUY a bunch more.

  • Report this Comment On May 08, 2009, at 6:52 PM, kamuirei wrote:

    @ ellielu - make sure you don't have the option of setting up a 403b on your own with a provider of your choice.

    Investment firms love to take advantage of teachers (I'm one too). However, ING isn't half bad. You might want to roll the other account over into an IRA so you can pick your own investments.

    Whatever you do, don't act rashly. Wait till school is out and you have more time to research. Relax.

    It could be much worse... I met a very friendly salesman from AXA once that wanted to sell me, a 25 year old, an annuity with a fee around 2%.

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