6 Dividend Divas

The Dow breached the psychologically important 10,000 level yesterday, marking a pivotal point in the market's torrid ascent since the financial market's crash one year ago. Despite the stock market's climb, investors are skeptical of the its ability to sustain this rally further, in light of the financial sector's ills and the economy's underlying problems.

If any of these forces do rear their ugly heads, it's important to have dependable income streams from dividend-paying stocks to balance out your portfolio.

JPMorgan Chase's (NYSE: JPM  ) earnings report serves as an example. The bank, which reported third-quarter earnings yesterday, was able to turn an eye-popping profit thanks to fixed-income trading, which balanced out losses from its consumer credit business. The same idea applies to your portfolio. When one part turns, the other part balances it out.

Aside from stable returns, dividends can signal a company's financial health -- especially in this economy, in which former steady payers such as Bank of America (NYSE: BAC  ) have slashed their dividends. But mature companies that still have more cash than they need, even in this stormy market, are some of the strongest businesses out there.

Investing in stocks such as Williams Partners (NYSE: WPZ  ) and National Grid (NYSE: NGG  ) , which yield 10.1% and 6.1%, respectively, can give you a steady return in a volatile market. And when the recession clears, these strong companies should generate even greater returns for investors as their shares rise.

How do you find solid companies with strong dividend yields? I've done some of the dirty work for you, with help from The Motley Fool's CAPS screener. To search for stocks with hefty dividends, I screened for companies with:

  • A minimum dividend yield of 5%.
  • Market caps of $1 billion or greater.
  • Five-star ratings, the highest possible, from our 140,000-member CAPS community.

Here's some of what popped up from my screen:

Company

Market Cap (in billions)

Current Dividend Yield %

Alliance Holdings (Nasdaq: AHGP  )

$1.3

8%

Amerigas Partners

$2.1

7.2%

Penn West Energy Trust (NYSE: PWE  )

$6.8

10.7%

National Grid

$23.2

6.1%

Royal Dutch Shell (NYSE: RDS-A  )

$189.0

5.7%

Williams Partners

$1.3

10.1%

Data from Motley Fool CAPS.

Dividends are one way to search for quality companies, but it's important to dig deeper and make sure that any individual investment is right for your portfolio. Dividends should -- and the key here is should -- be accompanied by strong management teams, balance sheets, and cash flows, all of which reflect a strong, properly positioned business with a competitive advantage.

But that's not always the case. Large debt loads, especially coupled with declining operating results, can be red flags that warn of a looming dividend cut. If companies need cash to refinance or put back in their business, they won't keep giving it back to shareholders. Make sure to check for debt levels on the balance sheet, along with revenue and the amount of cash the company is generating from operations. The amount of debt could determine the difference between a dividend diva and a dividend dud.

Also, pay special attention to whether a company's dividend yield goes much above 8% for common stock. If the yield has leaped recently, chances are it's because the stock price has fallen sharply, not because the company raised its dividend.

REITs, which are required to pay out a large portion of their earnings, are an exception to that rule. However, still-tight credit markets mean that rolling heavy debt loads in this environment could be a death sentence for some REITs. Foolish buyers should approach with caution.

The above table is a great place to start your search, but you'll still need to stay up to date with the doings of dividend divas. In a market where cash is king, their payouts could still prove fickle. Keep an eye on your favorite stock candidates' fortunes with help from Motley Fool CAPS.

More dividend-paying Foolishness:

Fool contributor Jennifer Schonberger owns shares of Bank of America, but does not own shares of any of the other companies mentioned in this article. National Grid is a Motley Fool Income Investor selection. The Motley Fool has a disclosure policy.


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