5 Dividend Divas

While the stock market got off to a bumpy start this year, it has moved in practically a straight line upward for the past couple of months. Volatility may be hibernating, but we're still seeing whether the economy can move from government-supported growth to private-sector growth. So far, the signs have been positive, but volatility could rear its ugly head again.

Given that uncertainty, it's important to have dependable income streams from dividend-paying stocks to steady your portfolio. Stocks such as Telecom Corporation of New Zealand (NYSE: NZT) and Omega Healthcare Investors (NYSE: OHI), which yield 10.9% and 6.3%, respectively, can give you a more stable return in a volatile market.

Though dividends generally mean reliable returns, they can also signal good health for a company -- especially after the worst year on record for dividends since 1955, when many formerly rock-solid companies such as General Electric slashed their payouts. Mature companies that still have more cash than they need are some of the strongest businesses out there.

Happily, there will be more dividend stocks to choose from this year. According to Jeffrey Kleintop, chief market strategist for LPL Financial, companies are poised to raise or reinstate their dividends this spring. "I think this year will be outstanding in terms of the number of companies and the size of their dividend increases, after 2009 was a record year on the downside," he said in an interview.

Companies took steps during the depths of the recession to cut costs -- including payroll reductions -- and widen their profit margins, equipping them with a lot of cash.

Finding promising dividend stocks
How do you find solid companies with strong dividend yields? I've done some of the dirty work for you, with help from The Motley Fool's CAPS screener. I screened for companies with:

• A minimum yield of 5%, to make it worth our while.
• Market caps of $1 billion or greater, to provide stability.
• Four- and five-star ratings (out of five) from our 160,000-member CAPS community, to pick among those most likely to outperform going forward.                 

Including the two mentioned above, here are five that I like:

Data from Motley Fool CAPS.

Dividends are one way to search for quality companies, but it's important to dig deeper to make sure that any individual investment is right for your portfolio. Dividends should -- and the key word here is should -- be accompanied by strong management teams, balance sheets, and cash flows, all of which reflect a strong, properly positioned business with a competitive advantage.

But that's not always the case. Large debt loads, especially coupled with declining operating results, can be red flags for a looming dividend cut. If companies need cash to refinance or put back into their business, they won't keep giving it back to shareholders. Make sure to check for debt levels on the balance sheet, along with revenue and the amount of cash the company is generating from operations. The amount of debt could determine the difference between a dividend diva and a dividend dud.

Also, pay special attention to whether a company's yield goes much above 8% for common stock. If the yield has leaped recently, chances are it's because the stock price has fallen sharply, not because the company raised its dividend. Real estate investment trusts, which are required to pay out a large portion of their earnings, are an exception to that rule. However, still-tight credit markets mean that rolling heavy debt loads in this environment could be a death sentence for some REITs. Foolish buyers should approach with caution.

Lastly, valuation is key for any stock that you purchase -- even if it offers a juicy dividend. If you purchase a stock that's fairly overvalued, the dividend may not make up for potential price declines.

The above table is a great place to start your search, but you'll still need to stay up to date on the doings of dividend divas. In a market where cash is king, their payouts could still prove fickle. Keep an eye on your favorite candidates with help from Motley Fool CAPS.

More dividend-paying Foolishness:

• 5 Dynamic Dividend Stocks
• 4 Dividend Stocks Showing You the Money
• 10 Dividend Stocks For the Next Decade and Beyond