4 Steps to Premium Dividends

Dividend-paying companies outperform non-payers over time. That's a fact backed up by stats, and it's a good reason why more investors should focus on cash when looking for investments. Unfortunately, it's not easy being a dividend investor. The search for high yields can lead to complicated industries such as banking, real estate, utilities, and telecom.

These industries are each a bit like a jungle. Lurking in the shadows are strange, scary creatures such as net interest margin and adjusted funds from operations (AFFO). Old, familiar signposts like gross margins and inventory turnover are nowhere to be found.

You're going to need a game plan if you want to find the best dividend-paying companies in these daunting industries. Here are four easy steps to get started.

Step 1: Pick one industry
It's better to know a lot about one industry than to know a little about four industries. So pick one and know the key metrics and players cold.

I prefer banking: Vaults full of cash, marble pillars, lollipops at the counter -- what's not to like? On the other hand, I yawn at telecom. You'll find it's easier to follow businesses you find interesting.

Step 2: Make a list
Pick 10 companies in your industry, and list the key ratios for each. This will give you a framework for evaluating any company in that industry. For banking:

This table gives an idea of ranges across the industry. For example, the dividend yields for these banks fall in a range of 1.6% to 3.9%. A bank with a yield of 7%, then, is out of the ordinary -- and may be too good to be true.

Step 3: Forget Yahoo! Finance
Internet portals like Yahoo! Finance and MSN Money are great for fast information about retailers and manufacturers. However, as you search for superior returns in the high-yield stock jungle, you are going to need more specific data. Many of the metrics and ratios provided by Yahoo! just don't apply to these industries.

The best place to get good data is directly from the company's SEC filings and earnings announcements.

For example, take a look at Duke Realty Corporation (NYSE:DRE), an REIT that owns and manages commercial properties across the United States. Funds from operations (FFO) for fiscal year 2005 cannot be found on Yahoo! Finance or MSN Money. FFO adjusts net income for property sales and depreciation, and it is a very important metric for evaluating an REIT's performance. We can only find FFO in the company's filings.

Step 4: Learn from others
It's easier to survive in the jungle if you have help. Learning from other investors will prepare you to travel solo.

You can do this by starting or joining an investment club. Or you can join Fool dividend guru Mathew Emmert at his Motley Fool Income Investor newsletter free for 30 days. Mathew's collection of dividend payers has bested the market by nearly 4 percentage points since 2003, on the back of payers like TXU (NYSE:TXU), which has returned more than 60% for subscribers. You'll also enjoy access to discussion boards devoted to helping you understand the ins and outs of market-beating dividend investing.

Foolish bottom line
These four steps will get you on the right track to being a better income investor. Along the way, don't be deterred by the strange acronyms or creepy accounting entries such as "amortization of deferred financing costs." With a little time and patience, you can be a market-beating, high-yield expert.

This article was originally published on Feb. 3, 2006. It has been updated.

Joseph Khattab is a Fool research analyst. He does not have a position in any of the companies mentioned. The Fool has a disclosure policy.