What makes for a compelling dividend stock? In this clip from "Ask Us Anything" on Motley Fool Live, recorded on July 12, Motley Fool contributors Tyler Crowe and Lou Whiteman discuss what they look for when assessing dividend-yielding stocks.


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Tyler Crowe: Because of where I invest typically in industrials, materials, energy, real estate, yes, I am not a tech person. I will be the first to admit it. I see a lot of questions about companies that I don't have the slightest clue about here so far. But for the most part, the companies that I am going to be investing in are probably paying dividends. As a result, I'm going to be looking at how they manage it for the simple fact that any company that starts paying a dividend, it's basically the crossing of the Rubicon. You can't go back from this. As a result, if you start cutting or you start doing something that is going to put that dividend payment into question, your valuation is going to get murdered. It was funny, I had a conversation with a CFO for a now defunct oil and gas company. It was a strange period where they made upstream master limited partnerships. It's the dumbest idea on the planet because you have a variable revenue stream trying to pay out consistent dividends. I flat up asked him after an interview. I said, "Why do it this way? Why not pay a base dividend or like a penny a quarter, knowing that you're going to have a lot of variable cash?" He's like, "If I went to the equity market with that offer, I get murdered. There's no way I could ever raise capital with that dividend structure." It's just how dividend expectation is in America. I know that Europe, they'll do payout ratio-based rules for their dividends, but that's just how it is. Now, we're starting to see some oil and gas companies go to a variable or a small base dividend with these huge payouts. But heck, oil's at $120 barrel right now, what else are you going to do? To make a very short question a long answer. Yes, I look at dividends for the simple fact that the majority of what I look at is going to have that. It's a big part of the thesis.

Lou Whiteman: You're talking about crossing Rubicon. There's so many examples like that, but PayPal (PYPL -1.83%) is just one right now that is in the angst. Every time this question gets up, will PayPal pay a dividend? I hope not because then what it means to the company. But look, you're talking about a company that has mature growth with almost $5 billion in cash and no debt. It doesn't seem like a red flag, but it is.

Crowe: Google? Alphabet? (GOOG 0.37%) (GOOGL 0.35%) How many billions in cash do they have? They don't pay dividends. There's these dodgy things like, "They pay a dividend. They're not a growth company anymore. It's their $1.5 trillion. What else do they got to do? Give me some money.

Whiteman: It's funny, I hunt all over the place and I don't necessarily look for dividends. Rocky Top your search is similar to mine. I want a decent yield although the metric is least important. Ten percent annual dividend growth when a max dividend payout about 75%, that means they're not over-committing their net income. I have a lot of mutual funds, a lot of things like that, just my core and I tend to look for growth in investment. But I also consider dividends to be part of that growth. I'll give you two that just fit my dividend profile. One right now, Target (TGT 1.28%). Target is both beaten down and they're yielding 3%. I still think there is a growth story there, maybe not a high tech growth story. But the combination of that 3% yield you can get right now plus the incremental growth, that makes it a compelling growth story. My favorite dividend company right now it's something along the lines of TransDigm (TDG -1.00%), the aerospace company, where it is the last thing they do with cash. They don't have a regular dividend. They want to buy companies. They want to invest. But then every year or so, they will pay a special dividend almost $35-40 a share just because this is what we have leftover. I'm not a retirement investment. I don't need that steady income, but my mindset for dividends isn't the pensioner model, but it's how is this part of the total growth story or how we will grow the investment? You don't just need to quadruple in stock prices, as nice as it is to get growth out of a stock. You can be a steady incremental grower with a good dividend and it will, over time, add up. That's one of the values of a dividend for a more mature company.