"Can I get both?"
If you're like me, that's the default stance on all of life's either-or choices -- whether the choice is as trivial as bacon vs. sausage at Bob Evans or as important as near-term enjoyment vs. saving for the future.
In investing, dividend stocks offer a golden two-fer opportunity -- the stable income of dividends plus the prospect of stock price appreciation.
Returns are bigger than you think
Now, some would argue that dividend stocks are boring -- that they're really just glorified bonds with little chance of big-time returns.
They'd be wrong.
My colleague Tim Hanson has explained that the biggest winner over the 1957 to 2003 research period was -- and still is -- a heavy dividend payer (spoiler: it's Altria
Want something more current? Another colleague, Todd Wenning, recently showed just how powerful the combination of dividends and stock price appreciation can be -- think 6,600% over 10 years.
I don't know about you, but I find those kinds of returns far from boring.
Keep reading and I'll explain what to look for in a dividend stock -- and then I'll show you some prime candidates for your next big dividend stock.
The path to dividend righteousness
When you're looking for a great dividend stock, you should look at all the normal things you'd look for in a great stock. This includes promising business prospects and a reasonable price point.
In addition, though, you need to assess the likelihood of a dividend cut. Just as a healthy dividend and a rising stock price can lead to turbocharged returns, a dividend cut that causes fearful investors to flee the stock can bring about unwelcome losses.
To assess the vulnerability, we need to make sure the dividend is supported by the company's earnings power. We also need to make sure the company hasn't taken on too much debt -- when mandatory interest payments on debt get too high, dividends are in danger.
Keeping this in mind, I used my industrial-strength Capital IQ software to run a screen for dividend-paying candidates. These stocks:
- Have low to moderate payout ratios (dividends divided by earnings)
- Have solid to excellent coverage of their interest payments (via earnings before interest or taxes)
- Are trading for reasonable multiples on their earnings
Here are a few companies that meet those criteria:
|
Recent Dividend Yield |
Payout Ratio |
Interest Coverage |
P/E Ratio |
|
|---|---|---|---|---|
|
Merck |
4% |
27% |
11x |
6.8 |
|
ConAgra Foods |
3% |
44% |
5x |
15.1 |
|
Johnson & Johnson |
3% |
43% |
37x |
14.9 |
|
Marathon Oil |
3% |
46% |
45x |
19.1 |
|
Sysco |
3.4% |
50% |
15x |
15.3 |
|
FPL Group |
4.2% |
47% |
3x |
12.1 |
|
McDonald’s |
3.3% |
49% |
14x |
16.4 |
Source: Capital IQ, a division of Standard & Poor's.
Each of these stocks is worth further research, but two of them merit special consideration.
The dividend gurus at our Income Investor newsletter have recommended both health-care giant Johnson & Johnson and food supplier Sysco. They both offer stable dividends, but there’s an additional kicker -- the Income Investor analysts believe the market's currently undervaluing them by 16% and 27%, respectively. If you'd like to see their entire write-ups on J&J and Sysco as well as all their recommendations, a free trial is yours for 30 days. Click here to get started.
Anand Chokkavelu owns shares of McDonald's and Altria. Johnson & Johnson and Sysco are Motley Fool Income Investor recommendations. Sysco is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of FPL Group and Sysco.The Fool has a disclosure policy.
