6 Strong Dividends With Room to Grow

I used to think dividend stocks were boring. But dividends can offer a growing bonus on top of the stock-price appreciation most of us look for in our investments. That's pretty exciting to me, and for anyone who wants to make money in the market.

The evidence is compelling. Between 1871 and 2003, 97% of stocks' return came from reinvesting dividends. Just 3% came from the price appreciation of the original investment in shares. And from 1980 to 2005, dividend payers outperformed non-payers by more than 2.6 percentage points per year.

What to look for
But not all dividends are alike, as you surely know. For one thing, it really matters what company is paying them. Some companies are much more reliable than others. And while a company may be solid, it may not be growing very briskly, or may have modest growth prospects. That's not ideal. You want companies that are healthy and growing. (Signs of a healthy company include smart management, low or manageable debt, ample cash, and attractive growth rates for revenue, earnings, and profit margins.)

Once you start looking at the dividend itself, you obviously want a significant one, and you also want it to be growing at a reasonable clip. In fact, it can be smart to favor a smaller yield if it's growing more briskly than a bigger, more stagnant, yield. The smaller one might soon outpace the bigger one.

Payout ratio matters
Can a dividend be too big? Yes, if a company isn't making enough profits to support its payout. That's why looking at the payout ratio is important.

Look at World Wrestling Entertainment (NYSE: WWE). It might seem irresistible with its 10% dividend yield and a five-year average dividend growth rate of more than 20%. (Heck, I'm drooling at that!) A glance at its payout ratio, though, reveals a number topping 200%. That means that the company is paying out way more than it's generating in profits. It doesn't spell definite doom, but it's a huge red flag. That's unsustainable. The company has suffered some due to the sagging economy, but it also seems to be in a bit of a transition phase, having lost some of its crowd-attracting stars and developing new ones.

If a company has a high payout ratio, either its earnings have to catch up, or it will likely need to trim their dividend. Such situations can bode ill for stock-price growth, too.

Candidates to consider
Therefore, it's smart to look for a modest payout ratio. Remember that since you want dividends to grow over time, you want some reassurance that the company isn't anywhere near its limit. Lower ratios also mean the company hasn't tied up most of its earnings with dividends, and it has the flexibility to seize other opportunities, such as acquisitions.

Here are some companies with attractive and growing dividends -- and reasonable payout ratios:

Source: Motley Fool CAPS.

You'll find attractive dividend payers in many different industries. Industrials Praxair and United Technologies are in the best position to benefit from an economic rebound. Praxair is a leader in industrial gases for a wide range of businesses. United Technologies, specializing in aerospace, elevators, and more, has been cutting costs, generating lots of cash, and meeting strong demand for its helicopters and other items.

Spanish bank giant Banco Santander has a regrettable ticker symbol and has faced problems linked to Spain's sovereign debt concerns. But the bank is considered by many to be healthy, and has been busy buying more assets recently. Meanwhile, investors like electricity and gas company MDU Resources' expansion into wind power.

Pharmaceutical concern Abbott Labs has been paying dividends for 38 years running, and holds long-term promise due to our aging population as well as health reforms delivering more consumers. Those same factors can boost the Walgreen drugstore network, which has already been growing its cash-generation powers with higher dividends.

It's hard to beat dividends when looking for wealth generators for your portfolio. They can even prop up your holdings during downturns. If that's not exciting, then give me boring every day of the week.

The right combination of traits can give you the dividend play of a lifetime.