If you're looking for stocks that will give you both a healthy stream of current income as well as the promise of potential growth for years to come, you'll find plenty of dividend-paying stocks that appear at first glance to fit the bill. But if you want the best dividend stocks you can find, you should also look for a key ingredient that only a select few stocks have. Later in this article, I'll reveal this must-have trait that gives you a key advantage over run-of-the-mill dividend payers.
Why you need dividends now
Before we get to that, though, you need to understand why dividend stocks are so popular and so powerful right now. The biggest reason is that in the quest for income, investors have fewer attractive alternatives than ever.
In particular, take a look at how little income some of the most popular income-producing investments earn right now:
- Short-term Treasury bills are as safe an investment as you can get -- but they pay less than 0.25% right now.
- The same goes for many bank checking accounts; your money is liquid and easy to get to, but don't expect to live off it.
- Even with longer-term investments like bank CDs and five- to 10-year Treasury bonds, rates of 2% to 4% with guaranteed zero growth potential aren't going to help you much.
You can get attractive yields from other types of bonds. For instance, corporate bonds, especially on the riskier end of the credit-worthiness spectrum, get you some additional income. A diversified portfolio of investment-grade corporates from iShares iBoxx Investment-Grade Corporate has a 12-month yield close to 5%, while speculative high-yield SPDR Barclays High-Yield yields more than 6.5%. In additional, municipal bond yields have soared lately, giving investors in iShares S&P National Municipal a 12-month yield of 3.75% that's federally tax-free.
But no matter what kind of bond you own, your potential long-term growth is limited. Even though a bond's value can vary greatly during its term, most bonds pay a fixed amount when they mature -- guaranteeing that you'll never get more than that if you hold the bond until maturity.
In contrast, dividend stocks have potentially unlimited upside. A successful company can both pay out healthy income and continue growing its business, pushing its share price up over the years. That's the best of both worlds for investors.
Getting the best
So how can you be sure you're getting the best dividend stocks for your money? Some investors go for the highest yields, but that can be dangerous. Often, stocks have high yields precisely because investors don't expect dividends to last. That was the case at Barnes & Noble (NYSE: BKS ) , whose $1 annual dividend went by the wayside due to substantial losses over the past year.
What I like to see from dividend stocks is a sizable insider ownership interest. To me, that shows that the people most involved in making the business succeed have the same desire I have as an investor: to see stable payouts and a steadily rising share price. So I looked for companies that have both high dividend yields of 2.5% or more as well as insider ownership of at least 10%. Here are some of the stocks that screen revealed:
% Insider Ownership
|Paychex (Nasdaq: PAYX )||3.9%||10.6%|
|Campbell Soup (NYSE: CPB )||3.5%||38.2%|
|Cinemark Holdings (NYSE: CNK )||4.2%||12.4%|
|Weis Markets (NYSE: WMK )||2.9%||53.9%|
|Westwood Holdings (NYSE: WHG )||3.5%||20.3%|
|Calavo Growers (Nasdaq: CVGW )||2.6%||15.0%|
Sources: Capital IQ, a division of Standard and Poor's, and Motley Fool CAPS.
Of course, just because a stock pays a nice dividend and has the backing of a core group of insiders doesn't guarantee future success. Dividend investors know all too well how even the most solid-looking stocks can get hurt in tough times.
But these stocks offer a good mix, both by giving exposure to multiple industries as well as different company size and standing among their peers. Combining well-known industry leaders like Paychex and Campbell with niche players like Weis and Calavo gives you a better diversified portfolio of dividend stocks.
So if you want the inside scoop on dividend stocks, remember to take a look at whether corporate insiders have loaded up on shares of their company. Insider ownership can give you a powerful boost of confidence that your investment will work as hard as it can for you.
As for those six dependable dividend stocks, add them to your watchlist now and track how they do in the future. And get more good dividend ideas in the Fool's free special report, "13 High-Yielding Stocks to Buy Today."