A good, solid company paying sustainable dividends is a great thing to own, especially during times when the market's near-term course is uncertain. Like, um, now.
Here's the thing about dividends: As long as the company can continue paying them -- as long as they're sustainable -- that's money you make no matter what the market does. In fact, assuming you're holding long-term and reinvesting those dividends, market dips can actually be good, in a way: Your dividends will buy more shares when prices are low.
The best gifts keep on giving
But the bit about sustainability is really important. Companies that pay a great dividend are great, but you should be wary of stocks with double-digit dividend yields. Many companies that show up in high-yield screens are there because they've gotten themselves into trouble -- and taken a big hit to their share price. They may even have already cut or eliminated their dividends -- but it can take a while for the big, online databases to catch up with developments like that.
One thing to consider when looking at sustainability is a moat -- a significant barrier to entry for new competitors. This is something Warren Buffett talks about frequently, and it's important: A big moat is a sign of a company that can sustain its success.
Long story short, don't just buy a fat dividend yield -- buy a good company.
Value is the extra edge
Companies that pay dividends don't tend to be hot growth candidates. On the other hand, given the odd dynamics of the market's rally over the past year, there are still some great, solid companies selling at what are arguably bargain prices.
So first, I looked for companies with competitive advantages that trade at reasonable valuations and don't have too much debt. Then to narrow down all of those good businesses, I looked for ones that also had a strong return on equity (a great quick indicator of management effectiveness -- another key to sustainability) and solid dividend yields. Here are some of the names I turned up:
|
Stock |
P/E |
Long-Term Debt/Equity |
Return on Equity |
Dividend Yield |
|---|---|---|---|---|
|
Automatic Data Processing |
15.3 |
0.01 |
23.6% |
3.3% |
|
Coca-Cola |
18.7 |
0.21 |
26.3% |
3.2% |
|
Honeywell |
14.0 |
0.71 |
24.3% |
3.0% |
|
McDonald's |
15.8 |
0.81 |
32.7% |
3.4% |
|
Kimberly-Clark |
13.4 |
0.86 |
35.0% |
4.0% |
|
Merck |
6.5 |
0.77 |
35.0% |
4.2% |
|
AstraZeneca |
8.4 |
0.54 |
37.2% |
5.3% |
Sources: Motley Fool CAPS. As of Feb. 23.
These aren't formal recommendations, just ideas at this point. You'd want to do considerably more research before buying any of them. For instance, is Coca-Cola expensive with a P/E of almost 19, especially now that it has recovered most of its losses since 2007? And of course, big pharmaceutical companies are never buys until after you've answered these questions: When do their big-name patents expire, and what's in the pipeline?
But these stocks definitely have characteristics worth looking for right now: strong returns on equity (I consider anything over 20 a good sign), value pricing, some potential for capital gains, durable competitive advantages, and -- last but definitely not least -- great dividends that are likely to keep flowing.
All of those characteristics are on the list of things the Fool's Income Investor analysts look for in the stocks they recommend. If you'd like some promising (and pre-researched) dividend-generators to buy today, you can see all of their recommendations free for 30 days. There's no obligation to subscribe.
