"Do you know the only thing that gives me pleasure? It's to see my dividends coming in."

-- John D. Rockefeller

In one of my previous jobs, I helped manage a group of large individual investment portfolios. Some, in fact, were nine figures.

The biggest investing lesson I took from studying those successful portfolios was this: Buy dividend-paying stocks and, most importantly, buy them early.

See, these portfolios contained long-term winners like Abbot Labs (NYSE: ABT), which, in most cases, had been bought decades earlier and were now paying out tens of thousands of dollars in annual dividend income.

The owners of the portfolios didn't just pick stocks like P&G out of a hat of blue chips and hope for the best. No, they took the time to select companies with sustainable business models with a long track record of increasing shareholder value through capital gains and dividend growth.

That extra effort to hand-pick the perfect dividend stocks certainly paid off for them, and they're reminded of their wise decision each quarter when their dividend checks roll in.

Your turn to build a dividend dynasty
Not all dividend stocks are created equal, however. Witness the recently slashed dividends from stocks like Idearc and Colonial Bancorp, which serve as a harsh reminder that dividend payments are not guaranteed. That's why it pays to study the company's free cash flow and payout ratio to make sure it can continue to pay dividends.

Before we get into all of that, however, let's get you a few dividend stocks to research. To get you started, we'll employ the help of both the 100,000 investors participating in Motley Fool CAPS and the new CAPS stock screener, which we will use to find dividend-paying stocks with:

  • Return on equity greater than 10%.
  • A dividend yield greater than 3%.
  • A four- or five-star CAPS rating.

Here are a few of the results:

Company

CAPS Rating (out of 5)

Dividend Yield

AT&T (NYSE: T)

****

4.1%

BP plc (NYSE: BP)

****

4.5%

Veolia Environment (NYSE: VE)

*****

3.4%

Total SA (NYSE: TOT)

****

3.7%

Biovail (NYSE: BVF)

****

13.1%

Data from Motley Fool CAPS and Yahoo! Finance as of 5/1/08.

These stocks appear to be promising, but this is not a list of formal recommendations. Instead, use it as a starting point for further research.

High dividend alert
Troubled Canadian biotech Biovail's dividend sure looks tempting, doesn't it? While the CEO recently said the dividend would "remain in place," investors should still be concerned about the fact that the company is presently paying out more in dividends than it makes in both profits and free cash flow. Unless that changes, don't expect this level of dividends for long. Think of it as just another reminder to remain smart about high-dividend stocks.

On the other hand, CAPS investors like jejhlake1 think Biovail can restore profitability and cash flows to the point where the dividend is more stable. In January, for instance, the player noted that the company was "Way under valued. Excellent dividend. Zero Debt." Another player, aladha, recently advised the community to:

Look for these guys to get another co-promote, in license or product acquisition opportunity as the likes of Pfizer (already a partner) continue to "right size" their product mix and sales force sizes and look for someone to keep the voice out there promoting some steady products that don't merit the time of the traditional blockbuster franchise products.

But there's also a lot working against Biovail at present. For one, a long-standing SEC investigation, which was finally settled in March, called into question the company's accounting practices. Biovail ended up paying a $10 million fine stemming from the accounting treatment of a strange trucking accident in 2003 where a bunch of drugs were lost. Moreover, its successful Wellbutrin XL drug now has generic competition from Teva Pharmaceuticals (Nasdaq: TEVA) and Watson Pharmaceuticals.

These events could already be factored into Biovail's share price, which remains 55% off its 52-week high, and CAPS investors think now's the time to give the stock a second chance. Of the 421 investors who have rated the stock, fully 394 (94%) think it will outperform the S&P 500 going forward.

What do you think? Will Biovail prove the bears wrong and provide dividend riches for patient investors, or will it become a generic dividend-slasher? CAPS' 100,000 investors are waiting to hear what you think. So sign up today. CAPS is 100% free and guaranteed to educate, amuse, and enrich.

Total is a Motley Fool Income Investor pick. A free 30-day trial to the dividend-loving service can be yours by clicking here.

Fool contributor Todd Wenning is dividend-crazy, but does not own shares of any company mentioned in this article. Pfizer is an Inside Value pick. The Fool's disclosure policy wallpapered its room with worthless Enron stock certificates.