Take Advantage of Today's Fat Payouts

It's a rocky road out there right now. Investors are pulling their money out of small caps in a "flight to quality," while others are taking their money out of the stock market altogether to wait for the turnaround.

You may be thinking about doing the same. After all, earning a little money looks pretty good right now, when stocks are being hammered across the board.

But there's a better option.

Paid parking
Right now, according to Bankrate.com, the best annual percentage yield on a five-year certificate of deposit is 4.50%. Money market savings accounts are yielding, at best, 3.97%. Five-year Treasury bills are paying only 2.82%. Go ahead and park your cash in those if you want. You'll get paid to wait until the market turns around.

But wouldn't you rather be paid 6%, 7%, or 8% to park your cash?

Dividend-paying stocks have been beaten down in this market -- as have those that don't pay dividends. But because dividend payers pay you more to wait when their stock price falls, today's volatility gives you an unparalleled opportunity.

The best-kept secret
Unlike stock prices, dividends are fairly stable. Thus, when the stock price falls, the dividend yield -- the dividend paid divided by the current price -- grows.

For example, if Company XYZ pays a quarterly dividend of $0.30 per share, and each share costs $20, it has a 6% annual yield. If the stock price falls by 25% to $15, the yield rises to 8%; if the price goes up by 25% to $25, the yield falls to 5%. Buying a dividend-paying company when its stock price is low gives you a substantial payout in the form of a high dividend yield.

Don't think you'll lose that high dividend yield when the stock price rises, either.

Suppose you spend $1,500 (without commissions) to buy 100 shares of Company XYZ at $15 each. You'll earn 8% in dividends over the next year -- or $120.  Now, suppose the price goes up to $25. Your overall investment is now worth $2,400, and you're still getting paid $120 a year. That's 5% of your current investment, but it's still 8% of what you paid in.

In other words, once you buy, you've locked in your yield!

The perfect time? Now.
With the worry and fear in the financial and housing sectors being so significant, even companies operating in more stable niches have taken significant hits. Thanks to that downward pressure, many companies that were paying a decent yield a year ago have a juicy yield today.

It's time to lock those in!

Here are just a few examples of companies whose yields have improved significantly over the past year.

The key to locking in high yields is to make sure the stock prices haven't dropped because the business prospects went down the tubes. Although companies are reluctant to reduce or eliminate dividends, it does happen if its business or liquidity prospects worsen.

For example, Washington Mutual was, last fall, briefly yielding 13% or more. But then the company slashed its dividend by more than 70%. Thus, you want to focus on companies whose dividends are supported by stable cash flows and conservative payout ratios.

Here's an idea
If you'd like a place to start finding today's best dividend payers, consider our Motley Fool Income Investor service. Each month, our analysts screen hundreds of companies, narrow them down, and present you with two ideas that have healthy yields as well as the potential for meaningful capital gains.

See the team's top dividend picks today by joining Income Investor free for 30 days.

Jim Mueller likes to be paid to wait. He does not own shares of any company mentioned. Pfizer and Bank of America are Income Investor recommendations. Pfizer is also an Inside Value choice. Washington Mutual is a former Income Investor pick. The Fool's disclosure policy pays metaphorical dividends.