Why Your Stock Is Probably Swindling You

Management has at least two obligations to its shareholders: to create value through capital appreciation, and to distribute value by paying a dividend or buying back shares when there aren't opportunities to reinvest at high rates.

Take a look at your portfolio right now, and ask yourself, "Are my stocks delivering on both of these promises?"

If you can answer yes, well, congratulations! But if you can't, keep reading. I'll give you the names of five stocks that can deliver -- no strings attached.

Where are all the dividends?
In 2009, companies in the S&P 500 cut their dividends by about $48 billion. And so far this year, dividends are down 9.4% from 2009's first quarter. According to a report from The Wall Street Journal, dividends are expected to rise again in 2010 by a mere 5.6%. Still, that leaves us down 17% from two years ago. As stated by an index analyst at Standard & Poor's, dividend payments probably won't reach prior levels until 2012 or 2013.

In the panic of 2008, hundreds of companies cut their dividends. And the imploding financial sector wasn't the only culprit -- steadfast companies like Dow Chemical (NYSE: DOW) slashed their payouts. Although Dow still pays a respectable 2.3% dividend yield, it has yet to produce free cash flow since 2008, so a dividend increase doesn't look like it's in the immediate future. But what about companies that have lots of cash, or have yet to raise their dividend after returning to financial health?

Most of the time, companies have terrible excuses, whether they state them or not, for why they aren't paying dividends. Take Apple (Nasdaq: AAPL) for example, which is sitting comfortably on $23 billion in cash. The company rarely makes acquisitions, and it typically accumulates tons of free cash flow, so there's simply no reason not to pay shareholders. And the theory that "tech" companies don't pay dividends is no longer valid -- both Microsoft and Intel pay substantial dividends.

Executives hesitate to pay dividends in part because it usually makes the company look more stable. A more stable company is less volatile, and when the stock price jumps around less, options are less valuable. And who do you think benefits the most from stock options? Yep, you guessed it -- higher management. According to The Wall Street Journal, "A CEO who pays or raises a dividend indirectly reduces the value of his stock options."

So why does it matter?
Over the long-run, dividend-paying stocks clearly outperform their non-paying counterparts. A study by S&P indicates that companies that pay dividends have outperformed non-payers by 1.9% annually from 1980 to 2003. If you're a buy-and-hold investor, that's a heck of a lot of money to leave on the table!

Dividends are also a great way to keep management in line. When a company pays dividends, it doesn't have piles of extra cash lying around. Many times, excess cash can provoke CEOs to indulge themselves with lavish offices, or to hastily rush into acquisitions at high prices. In fact, an academic study has suggested that high-cash firms earn future profit margins 1.5% lower than companies that leave less cash sitting around.

The Foolish bottom line
That's why at Motley Fool Income Investor, our analysts look for companies that pay hefty dividends, in addition to creating value by finding companies that are undervalued.

If a stock you own isn't paying a dividend and has the cash to do it, then it better have a darn good reason. If not, you're leaving money on the table that you could otherwise be making elsewhere.

A great way to start revamping your portfolio is to look for stocks that pay dividends and have done so for a long time. In addition, a low dividend payout ratio (under 80%) helps ensure they won't run into problems that may lead them to cut their payments in the future. I ran a screen for those exact attributes, then picked the best of the bunch to share with you. The results are listed below:

Data from Yahoo! Finance and DividendInvestor.com.
*Because of its master limited partnership status.

All five of these companies are stable dividend-paying stocks trading for reasonable valuations. In fact, one of the stocks above – Southern Company -- is a "buy first" recommendation from our Income Investor team.

If you'd like to find out the names of all five "buy first" recommendations, and get an all-access pass to all our past and present suggestions, just click here to start. It's absolutely free, and there's no obligation to subscribe.

Fool contributor Jordan DiPietro owns no shares of the companies mentioned above. Intel is a Motley Fool Inside Value selection. Apple is a Motley Fool Stock Advisor pick. Southern Company is a Motley Fool Income Investor pick. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended a buy calls position on Intel. The Fool has a disclosure policy.