3 Dividend Stocks to Diversify Your Portfolio

One of the best strategies for beating the market is by having a diversified portfolio. Think about it, if you invest in only one area, say technology, and the technology sector takes a hit, your portfolio is going to suffer as well. However, if you have a diversified portfolio, one sector can take a hit while the others continue to grow, thus growing your pocketbook. Let's consider three dividend paying companies that would make a great addition to your watchlist and help you diversify your portfolio.

Ah, the sweet smell of ... fertilizer?
Terra Nitrogen
(NYSE: TNH  ) , a producer and distributor of nitrogen fertilizer products, had a rough year in 2009 when it saw its net income drop by nearly two-thirds to just $144 million. But 2010 proved to be a much better year, and 2011 is starting off on the right foot as well.

Over the past 12 months, net income has doubled from 2009 levels, and free cash flow has improved even more, coming in at $309 million. Meanwhile, the company has no debt. And the icing on this cake? Terra Nitrogen's P/E is around 10, which is less than half the overall industry average. Even though Terra Nitrogen's current dividend yield of 13% may not stay quite that high, its five-year average dividend yield of more than 8% is something every dividend investor can appreciate.

A different way to invest in real estate
Although the housing market took a huge hit the last several years, one way investors can still benefit is by investing in a real estate investment trust, or REIT, like Chimera Investment (NYSE: CIM  ) -- through its subsidiaries it invests in high risk, residential mortgage-backed securities, residential mortgage loans, and commercial mortgage loans.

Mortgage REITs like Chimera operate with high levels of debt-to-equity. But, Chimera has relatively little leverage compared to competitors Annaly Capital (NYSE: NLY  ) , and Capstead Mortgage (NYSE: CMO  ) , which have debt-to-equity ratios three to five times as high as Chimera -- although lower debt is often seen with riskier investments like Chimera Investment's. Additionally, Chimera boasts a 20% return on equity, which far outpaces Annaly Capital's 15% and Capstead Mortgage's 11%.

Even better news? Mortgage REITs are required by law to pay out 90% of their taxable income to shareholders, and right now Chimera is paying out a dividend yield of more than 16%. That even outpaces many of its high-yielding mortgage REIT peers.

Discounts on defense
Defense contract company General Dynamics (NYSE: GD  ) is smaller than its competitor Boeing (NYSE: BA  ) , but that hasn't hindered it from becoming a force to be reckoned with. From 2008 to 2010, despite overall economic weakness, General Dynamics grew its sales and service revenues from $29.3 billion to $32.5 billion in 2010, and at the end of 2011's first quarter, General Dynamics was sitting on $57.6 billion in backlog.

If that's not enough to get you excited, perhaps General Dynamics P/E ratio will. Right now General Dynamics has a P/E just above 10, which is significantly lower that Boeing's P/E of 16, let alone Textron's (NYSE: TXT  ) 63 P/E. Moreover, General Dynamics pays a dividend yield of 2.7%, which ranks among the better-yielding stocks in the industry. And with the company paying out less than a quarter of its earnings in dividends, General Dynamics' dividend still has room to grow.

The Foolish bottom line
Unfortunately, there is no guaranteed way to know how a company will do in the future, but by diversifying your portfolio, your chances of success greatly improve.

Want more great stock ideas to diversify your portfolio? Click here to access The Motley Fool's free report, "5 Stocks The Motley Fool owns -- and You Should Too." These five companies were hand-selected by top Motley Fool equity analysts, and The Motley Fool put real money behind their picks.

Fool contributor Katie Spence loves Skittles. She does not own shares of any company mentioned above. The Motley Fool owns shares of Textron, Annaly Capital, General Dynamics, and Chimera Investment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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