5 Dynamic Dividend Stocks

• Email
• Share
• Print

The New York Yankees of the '50s and the Chicago Bulls and Dallas Cowboys of the '90s have one crucial element in common: consistent excellence in their organizations and performance. That's a rare accomplishment, but if you think it could never occur in your portfolio, think again. Carefully chosen dividend-paying stocks could be your key to superstar returns.

Build the next investing dynasty
These long-haul outperformers can help you build your fortune, as studies from investing gurus such as Jeremy Siegel have shown time and time again. Finding them is our Motley Fool Income Investor service's mission.

Johnson & Johnson (NYSE: JNJ), for example, has beaten the S&P 500 by 24 points since April 2006, and currently rewards investors with a 3.2% yield. Or consider VF Corp. (NYSE: VFC), which has topped the S&P by 38 points since June 2006, atop a current 3.1% yield. While these stocks happen to be Income Investor recommendations, you don't need to be a subscriber to get these great gains.

Identify new talent
With the help of Motley Fool CAPS, we'll search for the best dividend-paying stocks around. Here are several dividend picks that have also earned high ratings from our 140,000-member CAPS community:

Company	Yield	CAPS Rating (out of 5)
Marsh & McLennan Companies (NYSE: MMC)	3.3%	****
Illinois Tool Works (NYSE: ITW)	2.6%	****
Royal Bank of Canada (NYSE: RY)	3.4%	****
Lockheed Martin (NYSE: LMT)	3.6%	****
BP (NYSE: BP)	6.0%	*****

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and CAPS as of Oct. 22.

Any one of these quality companies would add some dividend pizzazz to your portfolio, but let's take a closer look at how BP stacks up.

Does my dividend have a glass jaw?
The last thing we want in a dividend-paying company is the risk that the company will fall off a cliff and have to pull back its dividend. This usually ends up being a double whammy because not only do you lose your dividend payout, but many of the dividend-loving investors who own the stock will run for the hills, causing the stock price to fall.

With that in mind, there are three places that I immediately tune into when kicking the tires of a dividend payer -- dividend history, financial statements, and business stability.

To start, we're going to have to take the good with the bad when it comes to BP's dividend history. In the late '90s and into the very early part of this decade, BP's payout was pretty inconsistent and investors had to live with an unchanged dividend for years at a time. The company has, however, been good about making sure investors get their due, and has raised its dividend in each of the last eight years. Of importance is that BP's payout ratio is 91% -- not necessarily in dangerous territory, but worth noting.

With a debt load of well more than $20 billion, we certainly can't say that BP's balance sheet is clean, but it has consistently kept its interest coverage ratio -- that is, EBITDA divided by interest expense -- in an extremely safe range. And while the company's healthy amount of spending on capital expenditures doesn't leave it swimming in a ton of extra green, it has been very consistent about producing enough cash from operations to cover dividend payments.

As for the stability of BP's business, at this point we're all too aware of the wild vicissitudes of the energy business. In the summer of 2008 there seemed to be no ceiling for oil's price, and then just a few months later the price was in free fall. But while BP can't control the price of its primary good, it can continue to keep a tidy financial house and scour the world for new sources of oil and gas to boost production and reserves.

What the bulls say
Not only does BP have the highest yield of the stocks mentioned above, it's also the most highly rated by the CAPS community -- a perfect five-star rating with more than 3,000 outperform ratings, including more than 1,000 from CAPS All-Stars.

One of those All-Stars, iamespeer, recently gave BP a thumbs-up and highlighted the company's work with alternative energy sources:

As well as being a huge player in oil & gas industry worldwide, BP also invest hundreds of millions every year in renewable energy projects, from wind to bio fuels. As if generating hundreds of billions in oil revenues each year isn't enough, they will be a major player in green energy for years to come also...

Get into the action
You can check out who else has been bullish on these stocks, as well as chime in with your own thoughts by heading over to CAPS. 

Dividend stocks could help you transform your portfolio from the flash-in-the-pan Florida Marlins into the dependable New York Yankees. And if you hate the Yankees, it's probably because they're so darn good, so darn often.

What do you think about BP? Leave your comments in the comments box below!