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These Dividend Stocks Have the Inside Edge

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In a world of low interest rates, many investors face a huge challenge producing enough income to survive on. Those who used to rely on bonds and bank CDs now find that those products no longer give them the returns they did several years ago. As a result, dividend stocks have become a popular income-producing alternative.

But few would deny that investing in stocks is a risky proposition. Especially if you're a conservative investor and aren't accustomed to the risks involved in stocks, you want at least some assurance that the companies you invest in are going to treat you right. That's why I set out in search of some stocks that give you an edge -- and while they aren't crash-proof, they will give you something many stocks don't: a friend in your corner.

I'll reveal six of those stocks below. But first, let's take a look at the one characteristic that should make you feel a bit better about a dividend stock.

The up-and-down world of dividend investing
With interest rates near record lows, dividend stocks seem impossibly generous with their payouts. For the first time in decades, the S&P 500's dividend yield has exceeded the interest yield on the 10-year Treasury bond. You can find many investments yielding 10% or more, and even many mainstream stocks top the 5% mark on their dividend yields.

But what dividend stocks give during good times, they sometimes take away later. For instance, take dividend darling Annaly Capital (NYSE: NLY  ) . Right now, it carries a 15% yield, as the interest rate spreads that power its profits are extremely wide right now.

It's not the first time Annaly has had impressive dividend payouts. From 2002 to 2004, the mortgage REIT also benefited from large rate spreads that produced yields in the 15% range for a time. But by mid-2006, after short-term rates had risen sharply, that yield had fallen by about three-quarters to just 3.6% -- and shares had lost a third of their value since early 2005.

Get someone on your side
In order to feel confident about your dividends, you'd ideally like to have someone with power and influence looking out for your interests. One way to get that is to focus on companies that have high levels of insider ownership.

Insiders who own significant share positions always give you an advantage. Because their incentives are aligned with yours, you can count on more shareholder-friendly treatment than when managers don't have don't put their money where their mouths are by investing in their company's stock.

So which stocks have the best combination of dividends and inside ownership? I found five large-caps that fit the bill, along with a smaller company that illustrates a point:

Stock

Insider Ownership

Current Dividend Yield

Carnival (NYSE: CCL  ) 13.9% 3.0%
Kinder Morgan 35.5% 4.5%
Limited Brands (NYSE: LTD  ) 17.8% 4.3%
Campbell Soup (NYSE: CPB  ) 44.1% 3.5%
Paychex (Nasdaq: PAYX  ) 10.5% 4.5%
World Wrestling Entertainment (NYSE: WWE  ) 63.6% 4.8%

Source: S&P Capital IQ as of Oct. 14.

Each of these stocks gives you an attractive yield of 3% or more, along with insiders that have at least 10% positions in their respective companies.

Now you shouldn't assume that having insiders involved automatically protects you from any dividend trouble. WWE shareholders found that out the hard way recently, as the company slashed its payout by two-thirds in light of falling profits making the former dividend level unsustainable. In order to make sure you have a secure stock, you still have to dig into the fundamentals of the company you're investing in to see if it has the financial strength to survive for the long haul.

Fortunately, though, several of these stocks not only have solid businesses but also long track records of dividend payments. Paychex had a 20-year streak of increasing dividends until 2010, when it held its payout constant. Kinder Morgan shares just became available earlier this year, but its sister MLP Kinder Morgan Energy Partners (NYSE: KMP  ) has a 15-year streak of rising dividends, and Campbell has raised its dividend each year for the past seven years.

Get on the team
So if dividend stocks are important to you, make sure you pick the right ones. By looking for insiders with substantial ownership, you'll make sure that the decision-makers that determine how much income you receive are on your side.

In fact, we have some more great ideas for dividend investors. Check out our free special report, "13 High-Yielding Stocks to Buy Today," where you'll even more stocks to whet your appetite for dividends.

Fool contributor Dan Caplinger likes ETFs almost as much as pretzels. 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 Limited Brands and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Paychex. 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 takes turns tighter than Jimmy Johnson.


Read/Post Comments (4) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2011, at 4:05 PM, DividendDude wrote:

    Since KMP is a master limited partnership, I find it hard to believe that insiders only own 35.5% - I thought the partners needed to own at least 80%. Also, the dividend yield for KMP is much, much higher than 4.5%. What gives with all of these discrepencies?

  • Report this Comment On October 17, 2011, at 4:18 PM, TMFGalagan wrote:

    @DividendDude - The stock listed in the table is Kinder Morgan, Inc. (KMI), the corporate general partner of the entity in which KMP shares represent limited partnership interests.

    Here's a link to an article to help with the alphabet soup of keeping these related entities straight:

    http://www.fool.com/investing/general/2011/03/16/is-this-com...

    best,

    dan (TMF Galagan)

  • Report this Comment On October 17, 2011, at 5:57 PM, whyaduck1128 wrote:

    You can't say that KMP "has a 15-year streak of rising dividends". Distributions from MLPs such as KMP are not dividends; rather, they are returns of the partner's capital, which may bear little relationship to taxable income from the partner's interest.

  • Report this Comment On October 17, 2011, at 9:38 PM, DividendDude wrote:

    Thanks for the link Dan.

    It surprise me to see that today's purchase of El Paso has affected each of the pieces of the Kinder Morgan puzzle rather equally - that's KMI, KMP and KMR.

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Dan Caplinger
TMFGalagan

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 Fool.com. 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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