But before buying dividend-paying stocks, there's an important point that everyone must remember: Dividend payments are not guaranteed.
Sure, companies such as Johnson & Johnson
And there may come a time when the board will advise its company to keep the cash and reinvest in the business.
Consider the cases of Goodyear Tire & Rubber
Hey, what about me?
While a dividend-cutting strategy can benefit a company by freeing up cash to invest in the business, for income-sensitive investors and those looking to harness the power of reinvested dividends, such an announcement can have a profound effect on financial plans.
If you find yourself in that camp, you should be looking for companies that not only have enough cash on hand to pay regular dividends, but also have room to increase them.
A good rule of thumb is to look for companies that pay out less than 80% of free cash flow and have a long track record of increasing dividend payments. That way, if the company falls on lean times, it should have some excess cash on hand to continue dividend payments.
The companies below provide an excellent example of this. Each has increased its dividend payouts by more than 10% per annum over the past five years while paying out less than 80% of free cash flow.
Average Annual Dividend Growth
Keep 'em coming
Reinvesting dividends in growing companies sure adds up over time. In fact, according to a study by Wharton professor Jeremy Siegel, fully 97% of the market's return from 1871 to 2003 can be attributed to reinvested dividends.
Unfortunately, the amazing power of dividends is dampened when a company cuts or reduces its payouts to shareholders. That's why it pays to look for stocks that don't stop -- financially sound companies with huge market opportunities and plenty of room to continue dividend payments.
These are exactly the kinds of companies that Fool dividend guru James Early and his Motley Fool Income Investor team look for day in and day out. Altogether, their picks are not only beating the market by six percentage points, but they also sport an average yield of 4%.
If you'd like to see the companies they've chosen for subscribers, simply follow this link for a free 30-day trial.
Todd Wenning owns shares of Procter & Gamble, but of no other company mentioned. Johnson & Johnson is a Motley Fool Income Investor choice. Coca-Cola is an Inside Value selection. The Fool has a disclosure policy.
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