5 Dividend Stocks on My Short List

I recently discussed the first stock for my new portfolio. While I like the prospects of Berkshire Hathaway, one of the drawbacks to owning it is its lack of a dividend. You can expect Warren Buffett or his hand-picked investment manager to grow the value of the stock going forward, but no gain would actually be reaped until a sale of the holdings. Since it is a stock I plan on holding forever, I am looking for some income for my portfolio.

Enter dividend-paying stocks. Not only will I reap a quarterly dividend from these companies, hopefully they will also appreciate in value as well. They are from various industries and have had various degrees of performance over the past few years. And while I haven't yet made a final decision on which stock I will be purchasing, I'm keeping an eye on all five.

Without further ado, these are the five dividend-payers currently on my list:

Company

Recent Price

Forward Yield

Payout Ratio

Douglas Dynamics (Nasdaq: PLOW  ) $14.02 5.8% 136%
Ford (NYSE: F  ) $12.34 1.7% 12%*
Microsoft (Nasdaq: MSFT  ) $28.23 2.8% 23%
Paychex (Nasdaq: PAYX  ) $31.67 4.1% 84%
Waste Management (NYSE: WM  ) $33.68 4.1% 65%

Source: Yahoo! Finance. *Calculated manually from earnings per share.


Douglas who?
Don't let the unassuming name fool you. As its ticker indicates, Douglas Dynamics is a leading producer of snow plows and other accessories. It's hard to put much faith in a business dependent on Mother Nature's whims, but I think that it has what it takes. Its payout ratio was exceedingly high last year due to some remaining charges from its 2010 IPO, but the company's leadership is committed to paying a large portion of earnings as dividends. As more of the IPO-related charges come off the books, the payout ratio should dip below 100%, equaling a sustainable dividend in the future.

The non-bailed-out U.S. automaker
Had I made this list a few months ago, Ford would not have been on it. Early in December, the company announced its first dividend in over five years, starting with a modest $0.05 in the first quarter of 2012. While that is modest, the reason why Ford is on my shortlist is the potential for growth in its dividend. By using estimated earnings for 2012, Ford's payout ratio will be only around 13%. If Ford can remain profitable, despite selling fewer vehicles in 2011 than General Motors, I don't think there is any reason that the dividend cannot continue to grow.

Tech giant invades … your life
Microsoft makes the most widely used computer operating system in the world. A Kinect-enabled Xbox 360 may move us into the future before we're even ready. The Windows phone was the talk of recently wrapped CES. Frankly, I'm more excited about its low payout ratio and already sizable dividend. Mr. Softy could easily double its dividend over the next few years and still pay only half of its earnings as dividends, leaving plenty of money to continue innovating.

As the economy goes …
I personally don't think that unemployment will continue at its current levels for much longer. Small- and medium-sized companies turn to Paychex for payroll, benefits, and other human-resource needs. Though there isn't a lot of room for growth in its dividend based on a high payout ratio, as more businesses begin to use its services, the 84% of earnings that Paychex currently pays out in its dividend begins to represent a bigger number overall.

One person's trash
I wrote about Waste Management four months ago, and the company has stayed on my radar ever since. If there is one thing that we can't do without, it's trash removal services. They have expanded services in recent years to include removal of hazardous and electronic waste, and, despite a rough 2011, seem ready to recover some of the losses from the past few years. An above-average dividend and some room to grow its payout ratio also help to make it an option for any portfolio. 

A lot of dividends to choose from
There are over 3,000 companies that pay a dividend, and many with much higher yields than those mentioned here. One of these five companies will be the second addition to my modest portfolio sometime within the next month. When I arrive at my decision, I'll be sure to let you all know. In the meantime, you can check out our new free report "Secure Your Future With 11 Rock-Solid Dividend Stocks" to see if any of my picks made the cut. Get your copy before it's too late.

Fool contributor Robert Eberhard holds no position in any company mentioned, but will be purchasing shares in Berkshire Hathaway as soon as his 401(k) rollover has been completed. Follow himon Twitter. The Motley Fool owns shares of Berkshire Hathaway, Waste Management, Ford, and Microsoft. Motley Fool newsletter services have recommended buying shares of Ford, Berkshire Hathaway, Waste Management, GM, Microsoft, and Paychex; creating a synthetic long position in Ford and a bull call spread position in Microsoft; and writing a covered strangle position in Paychex and Waste Management. 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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