The Right Dividend Stocks for You

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Dividend stocks have never been more popular. But even if you decide to heed the advice that thousands of professional advisors are giving their clients and pick up some dividend stocks for your portfolio, your work is far from over.

All too often, people think of all dividend stocks as being roughly the same. That notion obscures the truth that just because two stocks happen to pay dividends doesn't mean they have anything else in common -- and if you treat them as roughly the same, you could be in for a big surprise.

Experts agree: Buy dividend stocks!
Everywhere you look, stocks that pay dividends are getting all the attention. In the weekend edition of Barron's, for instance, the publication's annual review of top financial advisors showed that among the 1,000 advisors its list included, the most popular recommendation was for clients to buy dividend stocks.

The good news is that there's no shortage of attractive dividend stocks out there right now. With rock-bottom interest rates on alternatives like bonds and bank CDs, even the broad stock market overall has a dividend yield that's competitive in comparison to 10-year Treasury rates. With all those choices, though, it's harder to dig through them all to find the best ones for your portfolio.

To help do this, let's look at several types of investors and the dividend stocks that might appeal most to each group:

The conservative investor
Many investors are looking to dividend stocks for the wrong reason: as a replacement for bonds. No stock can truly give you the security that a Treasury bond provides. But the next best choices are stocks that trade at low valuations and have healthy but sustainable dividend payouts.

One promising stock for conservative investors is Intel (Nasdaq: INTC  ) . It trades at just 11 times trailing earnings, yet it yields more than 3% and has been boosting its dividend for some time. With its legacy PC-chip business, it's plenty strong, but it's also moving into the mobile field. That potential growth could make a big difference in its long-term prospects, which is why I made a CAPScall just last week for the stock to outperform.

Making sector bets
Dividend stocks are also a smart way to play certain sector themes. By focusing on dividend payers in a given business, you can get paid while you wait for macroeconomic trends to play out.

For instance, master limited partnerships and royalty trusts give you exposure to energy, with as conservative or aggressive positions as you care to take. Kinder Morgan Energy Partners (NYSE: KMP  ) is a low-risk way to profit from increasing flows of oil and gas through pipelines, while BP Prudhoe Bay (NYSE: BPT  ) and similar royalty trusts let you target particular oil fields for their specific profit potential. Both provide massive yields with tax benefits, and both have upside potential if energy continues to be strong.

You can find similar ways to play a host of other sectors. Big pharma stocks pay high yields now, but there, patent expirations threaten what would otherwise be solid growth from an aging world population. It all depends on your views of a particular industry.

The speculator
If you like shorter-term bets, then the highest-yielding investments in the market may be to your liking. Annaly Capital (NYSE: NLY  ) and Chimera Investment (NYSE: CIM  ) have paid double-digit yields for years. And if you believe the Federal Reserve, the underpinnings of their highly leveraged businesses should stay intact for another couple years.

That gives you the chance to cash in and get out before an eventual rate hike puts the skids on their profits. But if you're left holding the bag, all those dividend gains could evaporate quickly -- as they did for some investors in 2011.

To all their own
Dividend stocks are indeed useful to own, but they aren't interchangeable. If you make sure you get the right dividend stocks for your needs, you'll be a lot happier with the results in the long run.

For more information, we've got a special report that you should read. Let me invite you to learn about 11 dividend stocks tailor-picked for a variety of purposes. It's absolutely free -- but don't wait: Click here and read it today.

Fool contributor Dan Caplinger knows all too well that one size doesn't fit all. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Chimera Investment, Intel, and Annaly Capital. Motley Fool newsletter services have recommended buying shares of Annaly Capital and Intel. 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 Fool's disclosure policy is all things to everyone.

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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