Investors have clamored for high-yielding dividend stocks since Lehman Brothers collapsed in 2008. And we here at The Motley Fool have responded by offering both advice and forewarning about the market's hottest dividend-paying companies.
After reviewing some timely guidance from several dividend experts, I'm going to introduce you to a little-known company based in Milwaukee that pays a highly respectable dividend while minimizing the risk to your portfolio.
The ups and downs of dividends
If you need to construct a dividend portfolio, then you've come to the right place.
Financial editor Dan Dzombak's "High-Yield Dividend Portfolio" has crushed the market by nearly 11 percentage points since last March. And while analyst Jim Royal's "World's Best Dividend Portfolio" hasn't done quite as well, he's still beaten the S&P 500 by four points since its inception in June.
At the same time, however, it's important to be wary of dividend yields that seem too good to be true. As they may just be.
In a recent column identifying hot stocks that could implode your portfolio, financial editor and Fool contributor Dan Caplinger identified risks associated with high-yielding master limited partnerships like fertilizer company Terra Nitrogen (NYSE: TNH ) and oil and gas producer Linn Energy (Nasdaq: LINE ) .
Meanwhile, I've previously discussed the danger of investing in super-high-yielding mortgage REITs like Annaly Capital Management (NYSE: NLY ) and Chimera Investment (NYSE: CIM ) . And Jim Royal's column about the market's scariest highest dividends urges investors to be wary of dividend-paying telecoms like Frontier Communications (NYSE: FTR ) and Telefonica (NYSE: TEF ) , among others.
As a general rule, just remember that a high dividend yield generally means high risk.
Can you have your dividend cake and eat it, too?
The trick is to find a company with a high yield yet reasonable risk. And that's what I think I've found in Douglas Dynamics (NYSE: PLOW ) , a sleepy manufacturing company that's paid a whopping dividend yield of almost 8% over the last 12 months, including the special dividend it paid in March.
Douglas is a textbook Peter Lynch stock in many respects. It has a boring, nondescript name, and it produces boring but necessary goods -- snow and ice equipment for light trucks under the Western, Fisher, and Blizzard brands.
While the company's net income fell in 2009 and 2010 as a result of the economy, there's reason to believe it'll rebound. As anyone who's lived in the snow-belt knows, snow-removal equipment is non-discretionary. Purchases of new equipment can be postponed in favor of new parts and maintenance, but they can't be avoided forever.
And this is exactly what Douglas has seen over the last two years. Its sales of parts and accessories for 2009 and 2010 were 45% and 34% higher, respectively, than the averages for those categories over the preceding decade. Meanwhile, its sales of new snow and ice control equipment, which account for more than 85% of Douglas' revenues, were down by 7% in 2009 and 6% in 2010 as compared to 2008.
In 2011, however, this relationship has begun to change in Douglas' favor. In its most recent quarterly report, for example, Douglas noted a whopping 10% increase in year-to-date unit sales of new equipment over the same time period in 2010. And its sales of parts and accessories increased yet again by an additional 40%! Thus, it appears that Douglas' pent-up demand is coming home to roost in a big way.
There are also a number of intangible qualities that I believe add to this company's allure. For example, the CEO has been with the company for nearly 20 years, has a 1.7% stake in Douglas, and is properly incentivized to maximize operating income and free cash flow. The company is also aggressively paying down its debt. Last year, for example, it took much of the proceeds from its IPO to reduce its long-term debt. And its employees are non-unionized and seemingly content, as Douglas was chosen recently as one of the best places to work in Southeastern Wisconsin.
You never know what you'll find
Finding a dividend stock like Douglas that has a high yield and a seemingly reasonable level of risk is tough when everybody else is clamoring for the same thing. It's for this reason that our analysts recently issued this free report: "Secure Your Future With These 11 Rock-Solid Dividend Stocks." It uncovers stocks that, even more than Douglas, pay hefty quarterly dividend checks and allow you to sleep soundly at night. To get your free copy of this report before the rest of the market learns about its recommendations, click here now.