These Stocks Are Gifts That'll Keep On Giving

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You know what I like right now? Dividends.

A good, solid company paying sustainable dividends is a great thing to own, especially during times when the market's near-term course is uncertain. Like, um, now.

Here's the thing about dividends: As long as the company can continue paying them -- as long as they're sustainable -- that's money you make no matter what the market does. In fact, assuming you're holding long-term and reinvesting those dividends, market dips can actually be good, in a way: Your dividends will buy more shares when prices are low.

The best gifts keep on giving
But the bit about sustainability is really important. I love companies that pay a great dividend, but I'm wary of stocks with double-digit dividend yields. Many companies that show up in high-yield screens have recently gotten themselves into trouble -- and taken a big hit to their share price. They may even have cut or eliminated their dividends -- but it can take awhile for the big online databases to catch up with developments like that.

One thing to consider when looking at sustainability is a moat -- a significant barrier to entry for new competitors. This is something Warren Buffett talks about frequently, and it's important: A big moat is a sign of a company that can sustain its success.

Long story short, don't just buy a fat dividend yield -- buy a good company.

Value is the extra edge
Companies that pay dividends don't tend to be hot growth candidates. On the other hand, given the odd dynamics of the recent market run-up, there are some great, solid companies selling at what are arguably value prices, even now.

So first, I looked for companies with good, sustainable moats. Then to narrow down all of those good businesses, I looked for ones that also had a strong return on equity (a great quick indicator of management effectiveness -- another key to sustainability) and solid dividend yields. Here are some of the names I turned up:


CAPS Rating (out of 5)


Long-Term Debt/Equity

Return on Equity

Dividend Yield

Caterpillar (NYSE: CAT  )






Bristol-Myers Squibb (NYSE: BMY  )












Exelon (NYSE: EXC  )






Altria (NYSE: MO  )






Merck (NYSE: MRK  )






Paychex (Nasdaq: PAYX  )






Sources: Motley Fool CAPS; Capital IQ, a division of Standard and Poor's.

These aren't formal recommendations, just ideas at this point. I'd need to do considerably more research before buying any of them, and so should you. For instance, Altria generates plenty of cash and pays a big dividend, but it has a fair bit of debt, and I'd like to know why. Is Paychex expensive with a P/E of almost 19, even though it's still almost 20% below its 52-week high? And of course, big pharmaceutical companies are never buys until after you've answered these questions: When do their big-name patents expire, and what's in the pipeline?

But these stocks definitely have characteristics worth looking for right now: strong returns on equity (I consider anything over 20 a good sign), value pricing, some potential for capital gains, durable competitive advantages, and -- last but definitely not least -- great dividends that are likely to keep flowing.

All of those characteristics are on the list of things the Fool's Income Investor analysts look for in the stocks they recommend. If you'd like some promising (and pre-researched) dividend-generators to buy today, you can see all of their recommendations free for 30 days. There's no obligation to subscribe.

Fool contributor John Rosevear has no position in the companies mentioned. Paychex and SYSCO are Motley Fool Inside Value selections and Motley Fool Income Investor selections. You can try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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10/25/2016 10:22 AM
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