Making the Most of Your Dividends

If you're at least as stock-savvy as I am, you probably know these three things about dividends:

• Seeking stocks that pay significant dividends can help make you rich.
• Choosing dividend-paying companies that have increased their dividend payouts significantly in the past is even better.
• Dividend yields rise when stock prices fall, and vice versa.

However, we don't always consider these facts as a whole. We may get excited by a stock with a steep dividend yield, but fail to investigate its history of increasing that dividend. That oversight could be a mistake.

If you're looking at two companies -- one with a 2% yield, and one with a 4% yield -- the former company might increase its dividend regularly and considerably, while the latter company might rarely raise it at all -- or eliminate it. Last year, many companies, including General Electric (NYSE:GE), Dow Chemical (NYSE:DOW), and Pfizer (NYSE:PFE), slashed their dividends significantly.

We should also remember that yields often fluctuate. In these days of considerable market turbulence, with many companies watching their stock prices fall sharply, dividend yields are spiking all over the place. Those increases make now a particularly promising time to for dividend investors.

Hello, dividend heaven
Imagine that Scruffy's Chicken Shack (Ticker: BUKBUK) pays a $2 annual dividend ($0.50 per quarter) and sports a stock price of $60. That makes its dividend yield 3.33%, or $2 divided by $60. Assuming the dividend holds steady, look how the yield changes as the price falls:

It's true that if you buy 100 shares at any of these prices, you'll receive no more or less than $200 in dividends yearly from Scruffy's. But that income will cost you a lot less when you buy your shares at $40 instead of $60. Thus, your yield -- the income you receive relative to the price you paid -- will be higher. 

Focusing on growth
Companies with consistently growing dividends can be promising investments, since your dividend yield can keep rising even if the share price doesn't.

Here are a few companies with strong dividend yields and healthy dividend growth rates:

Source: DividendInvestor.com.

Don't stop at dividends
There's even more to consider if you want to make the most of your investments. When evaluating investment candidates, look at each company's financial health and competitive position. Dividends aside, does its future excite you? Is its stock fairly or attractively priced?

If you can find companies that look like terrific investments even without their significant dividends, you may be set to profit from a powerful one-two punch: capital appreciation and dividend income.

As you scour the stock universe in search of companies that could make you comfy in your old age, look at all aspects of their dividends. Aim to take advantage of rising yields when stock prices fall, but consider the overall health and promise of the companies, too. That's the best way to avoid yield traps and invest in strong companies.