The New York Yankees of the '50s and the Chicago Bulls and Dallas Cowboys of the '90s had 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 returned 20% since April 2006, and it currently is rewarding investors with a 3.1% yield. Or consider Enterprise Products Partners (NYSE: EPD ) , which has climbed 98% since May 2004, atop a current 6.6% 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 the 150,000 members of our CAPS community:
|
Company
|
Yield
|
CAPS Rating (out of 5)
|
|
Marathon Oil (NYSE: MRO )
|
3.2%
|
*****
|
|
Allstate (NYSE: ALL )
|
2.7%
|
****
|
|
Verizon (NYSE: VZ )
|
6.5%
|
****
|
|
Caterpillar (NYSE: CAT )
|
3.2%
|
****
|
|
Pfizer (NYSE: PFE )
|
3.9%
|
****
|
Source: Capital IQ a division of Standard & Poor's and CAPS.
Any one of these quality companies would add some dividend pizzazz to your portfolio, but let's take a closer look at how Allstate 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 that 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.
From the debt perspective, Allstate's balance sheet is pretty sound, with a total debt-to-equity ratio of 35%. It's been the asset side of the company's balance sheet that's been causing indigestion in recent times though. In 2008, the company reported a hefty $1.7 billion loss, thanks in large part to hits it took on its investment portfolio.
But it wasn't just the bottom line that suffered from those investment losses. As a result of the losses, Allstate also decided to slash its dividend last year -- more than halving the payout. That move ended a 14-year streak of annually raising its dividend.
In all, the picture may seem pretty bleak for dividend investors. In fact, for many hardcore income-seekers, a payout cut like that is reason enough to write off the stock. However, there may still be reason to take a chance on Allstate.
The company's fourth-quarter results showed its investment portfolio continuing to improve, while its core business plugged along nicely. In all, the company produced $4.3 billion in operating cash flow in 2009, which was down from pre-crisis levels, but up from 2008. If cash production continues to move in the right direction, the company may soon find that it has the ability to start growing its dividend again -- perhaps significantly.
What the bulls say
Allstate is currently rated four out of a possible five stars on CAPS. While 520 members have given the stock a thumbs up, there have been enough naysayers to keep the stock from reaching CAPS' top rung.
One of the bulls is CAPS All-Star ontheemmis, a former Allstate employee who rated the stock an outperformer back in November of 2008, writing:
Current price is about 8-10 $below Book Price. I was employed by them for 38 years and know the corporate culture.They are a very conservative group and will not give away the store with lower premiums and they have a great handle on cost and claims frequency.
Since that pick, the stock has gained 27%, while book value has fallen slightly. But while the stock may not be as much of a bargain as it was when ontheemmis picked it, its current price-to-book multiple is still well below its historical range.
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. You may also want to check out a few of the other top-rated dividend payers above while you're there.
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.
I like dividends and since you're reading this article, I'm going to guess that you like dividends. But Anand Chokkavelu thinks dividends are dumb.
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