These Stocks Will Keep the Payouts Coming

The past year has been a great one for most stock investors. For those who seek out stocks that provide healthy dividends, however, the market's rally has been bittersweet.

Good news and bad news
In many ways, the stock market's recovery has been positive for dividend investors. This time last year, we had seen a number of long-paying blue-chip companies reduce or discontinue their dividends, with relatively few companies raising their payouts. Now that trend has reversed itself. Recently, we've seen dividend increases from companies like Coca-Cola (NYSE: KO  ) , Wal-Mart (NYSE: WMT  ) , and United Technologies (NYSE: UTX  ) . With exceedingly high cash levels at many companies, more corporate managers are deciding to return that money to shareholders via dividends.

The downside of the rally, however, is that it's harder to find good dividend yields. Compare, for instance, the current yields on these healthy dividend payers with what their yields were last year:

Stock

Yield Last Year

Current Yield

PepsiCo (NYSE: PEP  )

3.6%

2.8%

Intel (Nasdaq: INTC  )

4.0%

3.0%

Kimberly-Clark (NYSE: KMB  )

5.3%

4.4%

Colgate-Palmolive (NYSE: CL  )

2.9%

2.5%

Source: Yahoo! Finance.
Last year's yields are based on trailing-12-month payouts.
Current yields based on most recent quarterly dividend.

Bear in mind that these companies have increased their payouts since early 2009. But during the rally, their shares have risen faster than their dividends, resulting in their payout yields falling.

Is it sustainable?
The key for many dividend investors, though, is whether these payouts are sustainable. The last thing shareholders need is the double whammy of seeing a dividend cut, as that not only causes the immediate impact of a loss of income, but also typically results in shares getting beaten down by disappointed investors.

One way of trying to figure out whether a company can afford to keep paying dividends is by looking at how its earnings compare to its current payout. The idea is that if a company earns more than enough to cover its dividend obligations, then it should be able to keep paying those dividends well into the future. If a company can't earn as much as it's paying out, however, then its current dividend level may not be viable over the long run.

Thanks to recent earnings growth, many dividend stocks now have reasonably healthy payout ratios. Take a look:

Company

Current Payout Ratio

Projected 2010 Earnings Growth

Coca-Cola

56%

12%

Wal-Mart

29%

9%

United Technologies

37%

12%

PepsiCo

47%

12%

Intel

73%

113%

Kimberly-Clark

53%

9%

Colgate-Palmolive

39%

11%

Source: Yahoo! Finance.

With several of these stocks paying less than half of their earnings to shareholders through dividends, it's clear that they're not straining to sustain their payouts. Moreover, steady earnings growth should help these stocks not only maintain their current dividend levels but also support an increase, should the companies elect to continue their current dividend-raising streaks.

What to look for
The key to finding good long-term dividend stocks is not to get too greedy. Sure, you can find plenty of dividend payers with higher yields than the 2% to 4.5% that these stocks pay. But with higher-yielding dividend stocks, you really have to keep an eye on the companies and ask yourself two questions: (1) Can these companies produce enough cash to keep paying dividends at these levels? (2) Will they be able to see their payouts grow in the future? The ideal dividend stock not only pays you well now, but will also pay you even better for years to come.

As positive as the stock market rally has been for most shareholders, dividend investors know all too well that the truly amazing deals they were able to grab last year are a thing of the past. But that doesn't make dividend stocks a bad investment right now. As long as you focus your attention on conservative stocks that can support and grow their dividends over time, you'll be in a good position to reap strong long-term returns regardless of how the overall market performs.

If you like dividend-paying stocks, you shouldn't miss this tip. Check out Fool contributor Jim Mueller and his 10 reasons you should buy this stock.

Fool contributor Dan Caplinger never saw a dividend he didn't like. He doesn't own shares of the companies mentioned in this article. Intel, Coca-Cola, and Wal-Mart are Motley Fool Inside Value picks. Kimberly Clark, Coca-Cola, and PepsiCo are Motley Fool Income Investor selections. The Fool has created a covered strangle position on Intel, on which Motley Fool Options has recommended buying calls. Motley Fool Options has also recommended a diagonal call position on PepsiCo. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy pays great dividends.


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