6 Dividend Stocks You Can Depend On

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%

15.0

32 years

Clorox (NYSE: CLX  )

48%

3.5%

15.1

32 years

Nordstrom (NYSE: JWN  )

39%

3.4%

11.8

12 years

Source: Yahoo! Finance, DividendInvestor.com.

Clearly, these results by themselves don't make solid buy recommendations. Dividend health is just one factor in buying a dividend-paying stock; you also have to be comfortable that the underlying business model is strong and will continue to work in the years to come.

Keep those dividends coming!
But it's essential to do your best to stay away from stocks that are going to reduce their dividends. In such situations, you lose twice: You not only suffer the direct loss of income from the dividend reduction, but you also typically see share prices plummet as concerns about the health of the company arise.

So, as you search out great income-producing stocks, make sure you consider the possibility that a company may reduce or eliminate its dividend in the future. By being aware of warning signs and staying on top of the stocks you pick, you can steer clear of potential landmines and keep your money out of harm's way.

For more finding the right dividend stocks, read about:

Want some great dividend stock ideas? Check out our Motley Fool Income Investor newsletter. You can get a free look at our current recommendations today with a 30-day trial -- just click here to get started.

Fool contributor Dan Caplinger got burned by GE but still has plenty of his quarterly payments coming in. He owns shares of General Electric. The Fool owns shares of Procter & Gamble, which is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is certified landmine-free.


Read/Post Comments (5) | Recommend This Article (36)

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 July 10, 2009, at 11:04 PM, wolfhounds wrote:

    Excellent piece. And to think I bought each of these except JWN years ago.

  • Report this Comment On July 11, 2009, at 1:03 AM, robertf36009 wrote:

    Just bought into (SUG) at $16.80 Recent activity in the legislature coupled with the stocks favorable valuation make it attractive. With a P/E of 8.7 and a dividend of 3.54% or an annual $.60 the stock should perform well going forward. Hopefully the stock will put green shoots in my portfolio. Good luck and fool on.

  • Report this Comment On July 12, 2009, at 10:23 AM, lebaresq wrote:

    Agree with Abbott, P&G, McDonald's (div paid annually) and Clorox, Siemens instead of UTX for more international exposure.

    As a high-yield income investor, 'cash is king'.

    I profited from SUG several years ago. It's an 'under-the-radar' slow-growth defensive play, a public utility that owns a long-established LNG port facility and a cross-continent oil & gas pipeline, having substantial support for its dividend payout. NFG is comparable.

    Oil & gas pipeline MLPs (EPD, PAA, SXL, TCLP), rarely talked about in financial media, are similarly situated, their earnings derived from long-term contracts with utilities like SUG and heavy industrial users, payouts roughly 8% before considering tax-advantaged structure. 'Smart' money has likely been flowing into these since beginning of the year.

  • Report this Comment On July 18, 2009, at 1:09 AM, pethier wrote:

    He posts six and I own four of them.

  • Report this Comment On July 22, 2009, at 10:46 AM, sue507 wrote:

    Integry's Energy Group (teg) pays outstanding dividends. They are the parent company of Wisconsin Public Service. Also, RPM, (rpm) maker of Rustoleum products along with many other products. Their stock prices are very affordable right now.

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