7 Dividend Divas

With uncertainty surrounding the durability of the economic recovery and the impact of the European debt crisis on the U.S., volatility is back in full force. In stormy seas, it's important to have dependable income streams from dividend-paying stocks to steady your portfolio.

Stocks such as National Grid (NYSE: NGG  ) and Altria (NYSE: MO  ) , which yield 8.9% and 6.3%, respectively, can give you a more stable return in a volatile market.

Although dividends generally mean reliable returns, they can also signal good health for a company -- especially after the worst year on record for dividends since 1955. Mature companies that still have more cash than they need are some of the strongest businesses out there.

What's more, companies took steps during the depths of the recession to cut payroll and other costs and widen their profit margins, equipping them with a lot of cash.

In fact, nonfinancial corporations now hold a record $1.8 trillion in cash on their balance sheets as of the end of March, according to the Federal Reserve. That means corporations are poised to either invest that cash, or return it to the shareholders in the form of a dividend. In fact, that's already happening. Companies that had cut dividends, like General Electric, are starting to raise them again. Starbucks and Eaton have also ramped up their payouts to shareholders this year.

Finding promising dividend stocks
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. I searched for companies with:

  • A minimum yield of 5%, to make it worth our while.
  • Market caps of $1 billion or greater, to provide stability.
  • Four- and five-star ratings (out of five) from our 165,000-member CAPS community, to pick among those most likely to outperform going forward.                

Including the two mentioned above, here are seven that I like:

Company

Current Dividend Yield %

Market Cap (in billions)

CAPS Rating

Altria

6.3

$45.88

****

Copano Energy (Nasdaq: CPNO  )

8.2

$1.84

*****

Exelon (NYSE: EXC  )

5.0

$26.02

*****

GlaxoSmithKline (NYSE: GSK  )

5.2

$92.01

****

National Grid

8.9

$19.79

*****

Royal Dutch Shell (NYSE: RDS-B  )

6.3

$163.86

****

Telecom Corporation of New Zealand (NYSE: NZT  )

9.2

$2.69

*****

Source: Motley Fool CAPS.

Dividends are one way to search for quality companies, but it's important to make sure that any individual investment is right for your portfolio. Dividends should -- and the key word 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 for a looming dividend cut. If companies need cash to refinance or put back into 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 yield goes much higher than 8% for common stock. If the yield has jumped up recently, chances are it's because the stock price has fallen sharply, not because the company raised its dividend. Real-estate investment trusts, which are required to pay out a large portion of their earnings, are an exception to that rule. Foolish buyers should approach with caution.

Lastly, valuation is key for any stock that you purchase -- even if it offers a juicy dividend. If you purchase a stock that's overvalued, the dividend may not make up for potential price declines.

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

More dividend-paying Foolishness:

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. You can follow her on Twitter. Exelon is a Motley Fool Inside Value recommendation. Starbucks is a Stock Advisor selection. National Grid is an Income Investor pick. Motley Fool Options has recommended writing puts on Exelon. The Fool owns shares of GlaxoSmithKline. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2010, at 12:12 PM, CPACAPitalist wrote:

    About a year ago I moved the focus of my portfolio to dividend oriented holdings. Its a good feeling to know that even when the pps fluxuates, that you will be getting your 5-10% dividend yield. I'm 25 years old and I figure that a strong dividend position mixed with some growth potential investments will provide me with years of compounding balances. Reinvesting dividends are a great way to dollar cost average into companies you want to hold for the long term.

  • Report this Comment On August 04, 2010, at 5:27 AM, FelixMarb wrote:

    Dividend Aristocrats are companies in the S&P 500 that have increased dividend payouts to shareholders every year for the last 25 years.

    The S&P 500 Dividend Aristocrats 2010:

    http://www.dividend.co.nr

    Top 3: CenturyTel (7.9%), Pitney Bowes (5.8%) and Cincinnati Financial (5.6%).

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