The allure of dividends is simple enough -- companies put money in your pocket every couple months as a thank-you for investing in their business. And who doesn't love getting some extra cash?

But picking great dividend stocks can be a doozy. You've got yields, growth rates, payout ratios... a seemingly endless supply of percentage signs.

To help you untangle the path to passive income, our analysts are here to explain their secrets to identifying great dividend stocks live on YouTube! 

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To ask questions, click over to the YouTube version of the video below and hop into the chat box.

Note: After the broadcast is finished, a transcript of the video will be added to this page. 

Live disclosure: People on the program may own companies discussed on the show, and the Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.

Chris Hill: Hey, everyone! Thanks for watching! I'm Chris Hill, coming to you from Fool Global Headquarters in Alexandria, Virginia, joined by our Chief Investment Officer Andy Cross and Ron Gross, senior analyst. Thanks for being here, guys!

Andy Cross: Hey, thanks!

Ron Gross: Always a pleasure, Chris!

Hill: We're going to be taking your questions about stocks, so get ready with those. But first, we're going to talk about dividend investing. Let's start at a high level here, Ron. Investors have had a great 10-year run. A lot of big gains racked up in a lot of different industries. Dividend investing, for a long time, had the staid, boring, safe reputation. It's gotten a little bit sexier.

Gross: You think?

Hill: I think it's gotten a little sexier.

Cross: Dividends, sexy? I don't know.

Hill: We'll get into that, then. Why should investors think about dividend investing?

Gross: I like it because it shows you a management team that has a certain capital allocation discipline. What does that mean? It means that they’re able to look at their business, decide what capital they need to grow for the future, and determine if perhaps there’s excess that they don't need. And when they figure that out, they're typically more than happy to return some of that cash to shareholders, who are the true owners of the company. So, that makes perfect sense. It's usually a company that has a great team managing it, and usually, as a result of that, these companies that pay dividends also have stocks that perform quite well as well because these great management teams are at the helm.

Hill: Andy, how do you like to think about dividends, in terms of the entire portfolio? For a lot of people, they look at their portfolio and think, "Alright, I want some allocated to riskier stocks. I'm going to take one chunk and put it towards dividend investing."

Cross: I think that's a fine way to think about investing. To Ron's point about performance, if you go back over the last 30, 40 years, just looking at the S&P 500 and the stocks in that index that pay dividends, those stocks have outperformed the regular index by pretty substantial amounts. That's lessened recently as more and more companies come into the index and are allocating capital differently, much more into their companies as opposed to paying dividends, or sometimes they buy back stocks. From a performance perspective, you can get some dividend, get some cash that comes back either to your portfolio or to reinvest. Also, a nice thing about dividend payers is, those stocks tend to be more consistent. If you go back to the 1970s, for example, not only did dividend payers outperform the rest of the index, but they did so with less volatility. So, the stocks around the average of the returns didn't move as widely compared to non-dividend payers or the index in general. I think about allocating capital to dividend payers that have the consistency of performance that allows me to maybe, when stocks are more volatile, those ones, assuming that their dividends continue to grow, and they don't slash the dividends -- which is really bad. Investors don't like that. Assuming all that, that tends to add a little bit more stability and consistency to your portfolio.

Gross: Agree, but let's be clear, theoretically, if a management team can put all of their capital to work to generate high rates of return, as a shareholder, you should not want them to pay a dividend. You'd rather have them invest the capital, generate higher returns that accrue to the stock price. And then, when things perhaps slow down, growth slows down, they can then return some of the cash to shareholders. 

Cross: That’s the reason why Buffett at Berkshire Hathaway has never paid a dividend. He's always said, "Give me the cash, I'll invest it at far higher rates than you can." There are other companies that just can't invest that capital as fast. Apple was one, Microsoft another, where they just said, "We generate so much cash, we can't invest the returns on capital fast enough. The shareholders own the company, so we'll give some capital back to the shareholders. They've earned it by investing into the company."

Gross: And, as you mentioned, often it's in the form of buybacks, the returning of capital to shareholders. I think we saw a trillion dollars' worth of buybacks in 2018. An incredible number. A lot of the Trump tax cuts obviously increased cash flow, and folks put it towards buying back their own stock. 

Hill: I'm glad you mentioned Apple, Andy. For a couple of years, before Apple paid a dividend, that was a big debate. Are they going to pay a dividend? Are they not? For a very long time, companies that didn't pay a dividend were seen as being a little bit more exciting. They were looking to deploy that capital in other ways. Apple crossed that line. And that seems like a point in time where it was like, "Oh, OK, Apple did it, now anyone can do it." I hate to use the word stigma, but it really did seem like for a long time, there was a stigma attached to dividend investing, just from the standpoint of, "If a company is paying a dividend, then they're out of ideas."

Cross: The FAANGs minus Apple pretty much killed that, as you said, Chris. The sex appeal, to use a term, and the growth opportunity -- really, like Ron was saying -- you want companies that can find the places to deploy their internal cash flows at very high, effective rate. Plus, there's tax benefits or tax consequences for investors who get dividends because we're taxed twice -- first at the corporate level, then than at the individual level. So companies were like, "Hey, I'll invest that back into our business and grow it that way." Apple, so profitable, so much cash, it was just hard for them to do that. 

Gross: Just to push back a little bit, even though Apple will generate gobs of cash flow, last year, this year, next year, it is not a very high growth company. You can see that in the P/E ratio that it trades at, from a valuation perspective. It's not a company like Amazon, or a technology company that's just growing gangbusters, and for some interesting reason, decided to pay a dividend. 

Hill: Alright, before we get to some of the questions that are coming in from people watching, specifically about dividends, what should investors be looking for? What are some of the characteristics you like to see in a company when you're going hunting for dividend stocks?

Gross: For sure, steady cash flow. Growing cash flow is even better. A reasonable payout ratio, which means they're not paying out too high a percentage of the income or cash flow that they're generating, because that can get a little bit dicey. It could cause the company to have to pull back if things get a little slow, which you don't want to see. Also, you want a clean balance sheet. The company should not have too much going on in terms of cash needs, where if things slow down a bit, they end up having to cut that dividend to make a debt payment, an interest payment. So keep an eye on the balance sheet as well. 

Hill: Yeah, you touched on this earlier, Andy. We've seen recently some pretty big, well-known companies come out and cut their dividend, and in some cases, cut it in a big way. General Electric, Anheuser Busch, Kraft Heinz recently. It seems like, among other things, that is maybe the biggest red flag when people are looking for dividend stocks. 

Cross: I think it all really starts to add together when you think about things like the debt on the balance sheet, the cost to service that debt. The worst thing they can do is miss debt payments. Companies don't want to do that, investors don't want to see them do that. Investors don't like when companies cut their dividends, as we saw with Kraft Heinz -- plus a few other things with Kraft Heinz, too. But, generally, you want to see companies that generate plenty of cash flow so that's not really a concern. They can grow and they can service the cost of the debt on the balance sheet in healthy ways that don't require dividend cut. 

I'll just add one that Ron did not. The dividend yield, which is just the dividend that the company pays divided by the current stock price. Historically, that's been somewhere around 3.5% and 4%. It's trended down recently. Now it's 2% of the S&P 500. If that yield starts to get too high -- I know that in some ways, that may sound great, a lot of people may be like, "Wow, that's great. I'm getting a lot higher return on my investment. I'm getting paid more for the stock that I'm buying." The concern there is that investors are onto that, and sense a dividend cut. Anytime that starts to get near the 8% to 10% level, that's where I get worried. You want to stay away from those.

Gross: Agreed. That high dividend yield is often a consequence of the fact that a stock has just gotten slammed. It's just the way the math works. Again, dividend divided by stock price. The lower the stock price goes, the higher the dividend yield is. But, it could be a red flag that something is going wrong with the operating.

Cross: Often, the dividend is the last thing or second-to-last thing to be cut, and the earnings have already started to drop, so the stock has reflected that, and that's why the yield jumps up pretty dramatically. I'm not talking from 2% to 3%, I'm talking 5% to 7%. 

Gross: Interestingly, though, if you're unfortunately holding a stock that is struggling, sometimes the best thing for that company to do is cut the dividend because they need to keep some cash to either turn the business or make a debt payment. So, if you intend to be a long-term holder of that company, you should actually applaud the fact that management made that tough decision, even though there's consequence in the short term of the stock getting hit.

Cross: Chris, it gets back to your portfolio decision thinking about allocation. A lot of people like to see those proverbial checks come in the mail from those companies. So, a lot of times, when you're investing in dividend companies, you are relying on that dividend payment either to reinvest or for other reasons based on your personal situation. The dividend cuts, as Ron said, it'd be great if you're a long-term holder; unfortunately, you may not be in that position. That's why people sell the stock. 

Hill: We should also mention that rare group of companies that are in the title "dividend aristocrats." These are companies that have done such an amazing job with their capital allocation that they're actually able to not only sustain a dividend but raise it for decades. 

Cross: If you think about these companies as they are generating consistent sales growth, earnings growth, they have capital deployment programs, management teams, and they can just raise that dividend steadily year after year. Dividend aristocrats are north of 25 consistent consecutive years of raising that dividend. There are some that go back even further than that. That’s really a nice characteristic of a very steady performer. Often, as a bunch, the dividend aristocrats outperform the market and outperform the S&P 500 over time by 1.5 basis points -- with, again, a little bit lower volatility. You don't often find those big moonshots or companies that really dramatically grow over three, four or five years. But over decades, these are companies that can demonstrate their performance, and that's reflected in the stock price.

Gross: Right. Not surprisingly, you're not going to find the list filled with high-growth technology companies. You'll find energy companies, consumer product companies, industrial companies, companies that for years have been able to be what we call cash cows, generate a certain amount of cash flow that allows them, sometimes even modestly, to raise their dividend year after. 

Cross: Yeah, these are the Pepsis of the world, Kimberly-Clark, a lot of consumer companies --

Hill: Exxon Mobil.

Cross: Exxon Mobil. United Technologies. Again, companies that have a history of paying a dividend, and a consistent deployment program that allows them to raise that, and an investor base that expects that, too. That's actually very important because investors like those dividend payments, as we talked about before. Companies that can raise them often deserve a premium in the marketplace, and they earn it. 

Hill: Alright, let's get to some of the questions that are coming in. A lot of great questions. Thank you, folks, for that. A bunch of people asking, when it comes to the dividends, should I take the dividends as cash or should I DRIP them to build my position? DRIP, dividend reinvestment plans. Do you have a preference? Do you like the cash, or do you say, "No, just go ahead and put that back into more shares of the company."

Gross: I always give the disclaimer that I've done both. As a professional money manager, I always take the money in cash so I could re-deploy it to the best opportunity I saw at any given time. As a personal investor, though, I must admit, I reinvest them. It's just a simple, easy way to grow those shares over time, especially if you're a long-term buy-and-hold investor. You'd be shocked, over a 10-year period, how many extra shares you can get as a result of reinvesting them.

Cross: By way of example to that, I was pulling some data a little bit ago. Johnson & Johnson, a stock that I own, just from 1990, just the stock price has returned about 10% a year. If you reinvest those dividends over that time per year, that goes from 10% to about 15%. That really adds up over time, especially as you build your capital further and further as you invest it. 

Hill: To go back to the point you made, Ron, about your professional life vs. your personal life, it seems like if you're going to take the cash, you need to realize that you're going to have the proverbial good problem to have, which is, you're going to build up a cash position in your portfolio, and then what are you going to do with it? You don't want to just sit on it. You'll have to make the decision to deploy it elsewhere. 

Gross: You have to be the type of investor that has the time and the desire to constantly put that cash to work.

Cross: A lot of people depend on those dividends to live, too. That's an option to. Again, getting back to why investors often don't like to see dividend cuts. 

Hill: Assan asks, "How does the dividend date play into buying into a dividend stock? Does that matter?" 

Gross: Theoretically, it does not matter if you buy before the declaration day or after the pay date. Especially for long-term investors, it should really have zero effect.

Hill: Stephen asking, "Can you talk about the tools that you use to find stocks which are paying good dividend yields?"

Cross: Almost any site offers the data that has dividend yield. You can go to fool.com, Yahoo Finance, or other ones that offer at least dividend yield. Some offer screening tools. Morningstar does, too. That's probably the best. Not a lot offer the payout ratio, but as Ron said, that's just the dividend paid divided by the earnings. It gives a look into, "Can the company sustain the dividend and, ultimately and ideally, raise it over time?" I don't know a lot that have the payout ratio.

Gross: There are not. One caveat, though. When you do a screen or a search, don't just buy the one that you see that has the highest dividend. As we've discussed, that could be a red flag. And the bottom line is, it really should be about total return, which is your dividend yield plus your stock price appreciation. If you buy a stock with a dividend yield of 5%, which is a nice yield, but your stock actually goes down, what have you done for yourself? I would say not much. In fact, you've hurt yourself. It's really not just about the dividend, it's about total return.

Hill: Along those lines, a few people asking about Ford Motor, asking, "What do you guys think about Ford Motor? It's a cheap stock and it has a pretty high yield." I mean, if you're just screening for high yield, you're going to come up with a company that has been pretty challenged over the last few years, Andy.

Cross: To say the least, Chris. It used to be a recommendation of ours, and we sold it. I just think the headwinds for the likes of Ford are probably too great. Not one that I'm interested in buying at this price.

Gross: Agreed. I was a shareholder for quite a long time. Eventually I abandoned it and have not gone back. 

Hill: We talked earlier about General Electric. Jeff asked, "What are your thoughts on GE? Is this company turning it around?" I don't think any of us looked at GE a year and a half ago and thought, "Boy, this thing is poised for great growth." But, I think all three of us are surprised by how quickly GE has fallen on hard times. 

Cross: Yeah, and then the stock rebounded a little bit. Larry Culp just announced that it's going to be another year of not growing cash flows, in fact, negative cash flows. That's a worrying sign for dividends. The stock is reflecting that a little bit. General Electric has some big challenges. They're going to be selling off assets. I don't think it's a time to be picky about jumping into that stock at this price. 

Hill: Tom asks, "Are REITs considered dividend companies, or are they in a different classification than standard stocks?"

Gross: They're technically distributions, not dividends, but I think we can all think of them as dividends. Not a law, but Congress enacted, let's use the word law, because I can't think of the right word, back in the day, where in order to get certain favorable tax treatment, REITs must pay out in dividends 90% of their net income.

Cross: A ruling, maybe?

Gross: Yeah. As a result of that ruling, REITs typically pay higher dividends. 4%, 5%. We follow a lot here at The Motley Fool. ROIC see would be one ticker to mention. CCI would be another ticker. For sure, this is a good place to look for higher dividend yields. Remember, though, it's always about total return. 

One final thing about REITs is, because they're constantly paying out 90% of their net income, they don't retain a lot of cash, and therefore, if they ever need money for any big projects, they have to go back into the market and raise money, which can sometimes be problematic from a dilution perspective if you're a shareholder.

Hill: For those unfamiliar, REITs is short for real estate investment trust. For people who are new to dividend investing, are REITs a good first step? Or would you recommend, if you're a stock investor and you're thinking about dividend investing, maybe focus first and foremost on stocks that pay a dividend? 

Gross: I'm not sure it matters. If I had to choose, I would say maybe pick a stock and not a REIT as a jump-in, a company that you know, that's been around for a long time, that's consistent. Real estate is a beast of its own. Owning a trust that manages real estate on your behalf really is a whole different animal. So, maybe stick with a consumer products company or an energy company, something that's consistently paid overtime. 

Hill: Moving away from dividends, Jeff asks a question. "What is your current view on MercadoLibre?" Andy, for those unfamiliar with MercadoLibre, the eBay of Latin America, the Amazon of Latin America. They have a payment system that's doing pretty well for them.

Cross: Very positive. The stock's been pretty volatile the last year or so, but that Latin American market is enormous. They're the leading provider into it. When you think about the size of MercadoLibre vs. the size of Amazon or some of the other large e-commerce providers, you can see the runway to growth. It's managed very well. It does have the volatile markets of Latin America. But the consumer base down there is getting more and more excited and interested in commerce and using the likes of MercadoLibre and their payments system. So, long-term bullish for MercadoLibre for the next three to five years.

Hill: We've got a few people who are asking about dividends as a place to park cash, particularly if you feel like, as some people do, we might be due for a correction at some point in the next six months or so. Certainly, you think back to December, we had the sell-off then. Since the low of December 24th, I think the S&P 500 is about 15%. In general, do you look at dividend stocks as a good place to park some cash? 

Gross: I would say for parking cash purposes, no. But, if you want to introduce some conservatism into your portfolio, I would say in general, on average, dividend-paying stocks will be more conservative than perhaps some of the other companies, growth companies. Those typically tend to be what we call -- I don't love the term -- value companies, which in a significant downturn could theoretically go down less. But they will not insulate your portfolio. Those stocks will go down in the downturn as well. So, if you truly need that cash, I wouldn't park it anywhere. I would keep it in cash. Be careful there. 

Cross: Yeah. I'd emphasize that point. If you need that capital in even the next three years, don't put that in stocks. The market is just going to be too volatile for that. If you need that cash to make sure you have a payment of tuition or whatever it might be, make sure that's not in stocks, not even dividend-payers. 

Hill: Question from Rose Marie, who asked, "What are your thoughts on buying dividend ETFs vs. individual stocks?" Exchange traded funds. Certainly, there's greater liquidity there than you'll find in, say, a dividend-paying mutual fund.

Cross: True. Pros and cons. ETFs, liquidity, availability, they report their holdings every day. Low cost is a huge advantage. They often can be very, not just liquid, but traded a lot, too. I think it really depends on the ETF you're buying. There's actually a dividend aristocrat ETF. There are handfuls of ETFs created every day, it seems.

We focus generally on stocks. I think that's the best place to look for individual investors who accrue wealth over time, to have a diversified portfolio of stocks. ETFs, the trickiness also with those is, you have to make sure you understand what's in the ETF, in that basket. Sometimes, they can be skewed one way or the other. 

Gross: Agreed. I'm not anti-ETF in any way. I think they have a place in many portfolios. Probably from a dividend perspective, as well. I prefer to buy a basket, a handful, a portfolio, of my favorite companies that pay dividends.

Hill: A few people saying, "Hey, you guys were talking about REITs. What about MLPs? What do people need to know about them?" I guess we'll start with, MLP is short for master limited partnership.

Gross: They're often found in the energy sector. They often do pay dividends, which can be substantial. Be a little bit careful about purchasing an MLP stock in a retirement account because there could actually be tax consequences, where your retirement account would be forced to pay taxes, which is a complete mess because retirement accounts are not set up to pay taxes. To be on the safe side, I would hold them in regular accounts. But, for sure, master limited partnerships, depending on the one, are fine investments and a fine way to find dividends.

Cross: I think, again, generally, if you're starting, I wouldn't say MLPs should be your first bet. Some consumers stocks, a lot in the dividend aristocrats that we mentioned before. Apple and Microsoft certainly are ones that we're still encouraged by that have nice yielding stocks. MLPs can be a little bit tricky, certainly. Where you buy them and how you hold them in those accounts can be a little bit confusing. I don't think it's a place for the first-time investor to go.

Hill: Alright, last question before we get to four stocks reporting earnings next week. We'll get a preview of those. Terry asks, "What do you think about Kinder Morgan?" Speaking of companies in the energy sector.

Gross: I haven't looked at it recently, so that's my first caveat. KMI has been a recommendation here at The Fool. I believe it still is?

Cross: Yeah. Stock Advisor.

Gross: I've spoken to analysts who are very favorable on the company. I personally don't own it.

Cross: I think the energy space has been so volatile over the time. Kinder Morgan, which has pretty consistent distribution agreements in the energy space is one of the better-run ones. I think it can be fine from here. I don't follow it as closely as some of the analysts here do, as well. It's just, energy, which is where -- again, dividend payers tend to concentrate in certain industries. a lot in finance, a lot in the energy space as they generate cash for their shareholders. KMI is in there. The energy space has been an exceptionally volatile and tricky space. Depending on your opinions about where you think the energy space is evolving to, KMI is going to be a better investment or not. So, understand those dynamics as well.

Gross: I'll piggyback off of something that Andy said. If you're creating a dividend portfolio for yourself, because dividends can sometimes be focused in particular industries like energy, you might end up finding that you have a portfolio that is not diversified enough, is allocated too much to one sector. So, as you're building that portfolio, just be careful.

Hill: Alright, let's get to the stocks to watch next week. Andy, Stitch Fix (NASDAQ:SFIX), a company very much better known here at The Motley Fool, reporting on Monday. Last fall, the stock was around $50 a share. It's basically been cut in half since then.

Cross: Yeah, 52-week high to a low of $14, now it's at $27, so it's had a nice rebound with the rest of the market. Really, what happened in December is, when they reported their active client numbers at 2.93 million, it was a little bit lower than analysts had estimated. That's still 22% growth. I'm watching that to see what active client numbers they report, as well as revenue growth. The nice thing with Stitch Fix, it's a really profitable business and grows those cash flows very nicely. The revenue growth of 20% to 25%, if they can come up at the higher end, I'm watching that as well. And, gross margins, especially as they start to evolve from just a core women client into men's and kids, which maybe have a little bit less gross margin. They're making a lot of investments. They have more than 100 data scientists. The long-term growth trends that they are playing into with providing wardrobes through an online, sophisticated, AI-driven type of algorithm, I think is really encouraging, and the way that we're shopping. 

The stock is twice as volatile as the S&P 500. You have to understand that's what you're buying into.

Hill: Ron, Dollar General (NYSE:DG) reporting on Thursday. This is a stock that's done quite well over the past 12 months, up more than 30%.

Gross: Not as much to unpack with Dollar General as there is for a company like Stitch Fix. They did cut their full-year guidance at the end of the last quarter, so that's something to keep an eye on, if things have firmed. Now, they did that because of third quarter hurricanes, some other disasters, which, obviously, we hope won't repeat themselves. They had some ongoing transportation and other cost pressures, which actually could continue. But, they expect their growth to continue. They expect their 29th consecutive year of same-store sales growth coming. Things look pretty good.

From a competitive perspective, interestingly, Family Dollar, which is part of Dollar Tree, just recently announced that they closed 390 stores on top of the 120 they closed in 2018. So, the competition not doing so great, but Dollar General is doing well.

Hill: Also reporting on Thursday, Andy, Ulta Beauty (NASDAQ:ULTA), another stock up more than 50% over the past year. 

Cross: Symbol ULTA. The stock is at $305, hit a low of $200. Pulled back. Certainly one of the best-run retailers out there. Operates 1,200 beauty stores around the country. Their rewards program has more than 30 million members, and that's up 15%. That generates 95% of their sales. The growth in the rewards program, continuing to grow that quarter after quarter, year after year. That's something I'm watching.

Comps growth of 8% to 9%. Sales growth above 9%. Thinking about their e-commerce business that has really been on fire, growing 30%, 40%, 50%. I'm looking for at least 30% there on the e-commerce side. Ulta, continuing to get it done as a retailer that has proven that there are other ways to shop besides just Amazon.

Hill: Ron, sticking with retail, Dick's Sporting Goods (NYSE:DKS) reporting on Tuesday. Tough environment. Certainly, we saw Sports Authority go under a while back. Shares of Dick's Sporting Goods up about 20% over the past year. 

Gross: Yeah, not too bad. Last quarter their comparable sales, same-store sales, were a bit weak. We'll keep an eye on that, specifically in the hunting and the electronics categories. Could have to do with some decisions they made around firearms and selling firearms. Interested to see how those come in for this quarter. E-commerce sales were up 16% last quarter. Very important, obviously, in today's age of Amazon, to keep that number up. I'll be looking forward to seeing what that comes in at. And, finally, they just increased their dividend 22%. Speaking of dividends. Now stands at about 2.9%, a pretty nice yield.

Hill: Way to bring it back around to dividends.

Gross: Thank you.

Hill: I appreciate it.

Cross: Well done, Ron!

Hill: Ron Gross, Andy Cross, guys, thanks for being here!

Gross: Thanks!

Cross: Sure, Chris!

Hill: Thanks everyone for watching! Go ahead and click the subscribe button so you make sure you don't miss any of our live Q&As and all the great content on The Motley Fool's YouTube channel. I'm Chris Hill. Thanks for watching! We'll see you next time!