These Stocks Are Giving You a Raise

Wouldn't it be great to get paid for holding a stock, even while the market clobbers its price?

You can, of course -- if the stock pays dividends. While much of the news lately has gone to companies that have slashed or altogether eliminated their payouts, plenty still pay dividends -- and some have even raised them recently, despite the economy.

Yes, raised. Think that might be a buy signal?
It often is. Although rising dividends aren't always a good sign -- doomed investment bank Lehman Brothers raised its dividend 13% early in 2008, a hike that it clearly couldn't afford -- a company that raises dividends is generally feeling pretty good about its prospects.

If, of course, the feeling is backed up by a look at fundamentals. Can the business support an increased payment? Is its cash flow sustainable, even in the face of a dark economy? If you can answer "yes" to those simple questions, then the company is worth serious consideration.

The case for dividend stocks
Dividend investing may seem old-fashioned, but in this sort of market, finding a company that is paying a good dividend can be a very good thing.

Dividends, of course, are a company's way of sharing profits with its owners -- the folks who hold its stock. The stream of payments, usually made quarterly, is often expressed as the company's dividend yield, which is simply a year's worth of dividends expressed as a percentage of the current stock price.

In good economic times, a dividend yield of 2% or 3% is considered solid -- but nowadays, with stocks across the market way down, it's not uncommon to see dividend yields of 4% or 5% from conservatively run companies. If the company can sustain its dividend, that 4%-5% is money you'll be making no matter what happens to the stock price.

Putting the cash to work
If you're in retirement, dividends can be a helpful part of your overall income picture. If you're in wealth-building mode, reinvesting those dividends -- using them to buy more shares of the stock -- allows you to take advantage of dollar-cost averaging without having to add to your initial investment.

And here's a secret: Reinvested dividends have built an awful lot of fortunes over the years. Dividend-paying companies might seem boring compared to, say, fast growers, but those steady payouts through bull and bear markets can really pile up over time.

Who's paying the big bucks?
Finding a good company paying a sustainable dividend is a good thing. Even better, as I mentioned above, are companies confident enough about their prospects to raise their dividend payments in this market. Here are a few companies that have done just that in recent months:

Company

CAPS Rating (out of 5)

Dividend Yield

Size of Recent Dividend Increase

Abbott Labs (NYSE: ABT  )

****

3.3%

11%

Air Products & Chemicals (NYSE: APD  )

*****

3.2%

2%

Coca-Cola (NYSE: KO  )

****

3.7%

8%

Colgate-Palmolive (NYSE: CL  )

*****

3.0%

10%

FPL Group (NYSE: FPL  )

****

3.7%

6%

Kinder Morgan Energy (NYSE: KMP  )

****

9.0%

14%

Sysco (NYSE: SYY  )

*****

4.1%

9%

Data from Motley Fool CAPS as of March 23, 2009.

There are some excellent companies on that list, including blue-chip Coca-Cola, a longtime Fool favorite that is presently trading around its five-year low. That's an opportunity, folks. If you think soft drink sales are a recession-resistant category -- I sure do -- Coke is worth a very close look at current prices.

One caveat before you go looking for big yields: A super-high dividend yield could be a bad sign. Because the yield represents past dividend payments as a percentage of today's stock price, a high yield can sometimes be a sign of a company in deep trouble, one whose share price has fallen significantly -- and companies in trouble that aren't named "Lehman" tend to cut their dividends or eliminate them entirely.

Building a high-yield stock portfolio
That said, the market's struggles leave us with one heck of an opportunity to build a complete dividend-powered portfolio at discount prices. There are solid, bargain-priced companies paying sustainable dividends in nearly every corner of the market. A diversified portfolio of 10 to 15 of these stocks from different industries could be just the thing to carry your IRA through the recession -- and beyond.

Want a great way to get started that won't cost you anything? Good companies with good fundamentals and sustainable dividends are what James Early and team look for at our Motley Fool Income Investor service -- and they're finding lots of them right now. If you'd like to see their best bets for new money now, help yourself to a 30-day trial, completely free of charge. Just click here to get started. There's no obligation to subscribe.

Fool contributor John Rosevear loves great dividend stocks and owns a bunch, but doesn't have any position in the companies mentioned above. Sysco is a Motley Fool Income Investor pick. Coca-Cola is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 25, 2009, at 2:07 PM, Tusk87 wrote:

    Dividends are a valuable way to sustain a fixed income. As the article suggested, due diligence is the first rule. They company must be able to sustain the dividend without destroying itself! One must also be aware of the tax issues that are part and parcel of any dividends one receives. Currently they are taxed at 15%. That however may change drastically after 12/31/2010. Our current president seems to be inclined to allow that rate to continue for families/individuals that have gross incomes under $250,000. At the rate that our country is amassing debt and garnering international concern about it's ability to service said debt the situation could change very quickly. The Motley Fool's information is generally worth looking at but only a true fool would not do considerable research before climbing on a wagon that currently has a very shaky suspension system.

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