For income investors, there's no greater feeling then when that divided arrives in your account. In fact, for those depending on dividends to supplement income, the only thing sweeter would be if that check arrived more often.
So what if I told you that's possible?
While some stocks distribute dividends only once or twice a year, most U.S. stocks do so four times. This is always on a predictable timeline, and spaced apart by three months. It just so happens that US Bancorp (USB -0.20%) distributes dividends starting in January, American Express (AXP 2.56%) in February, and Wells Fargo (WFC -0.26%) in March. Because of this, investors would receive a dividend check every single month of the year.
Here's the catch: picking stocks because they line up a certain way isn't a recipe for success. Luckily for us, these aren't just any stocks.
Are those even dividend stocks?
Immediately, some of you may condemn my criminally loose definition of "dividend stocks." The highest yield, or annual dividend divided by stock price, is Wells Fargo's 2.5%. That is fairly high compared to most banks, but lower than what's normally associated as a great dividend stock.
I look at dividend stocks differently. First, I look at whether or not the company pays a dividend. If it does, it's a dividend stock -- and all three companies pass the test. After completely ignoring yield, I'll skip to evaluating whether or not I think the underlying business will grow over time.
Here's why that's so important: stronger businesses can better support their dividend, and create a greater total return -- or dividends plus capital appreciation. Over the last three years Wells Fargo, US Bancorp, and American Express have been impressive compared to S&P 500.
This is really important
There's one chink in the armor of looking for good businesses offering a dividend. As 2008 and 2009 proved, even great companies can fall victim to a tough economy. That's why it's important to look at payout ratios -- or dividends per share divided by earnings per share.
In general, businesses with payout ratios lower than 60% have a margin of safety. Meaning, if earnings fall the business can maintain its dividend. However, since Wells Fargo and US Bancorp's payout ratios have historically fluttered around 40% to 50% (with occasional spikes when earnings fell) we'll consider 50% the ceiling. With the two companies sitting just over 30%, there's plenty of wiggle room.
American Express is a completely different beast due to its lower historical payout ratio. With that said, the company has increased its dividend nearly 30% since 2012. It was also approved by the Federal Reserve to increase its dividend another 13% in 2014. Based on the companies growth and current low payout ratio, I don't see any reason this trend couldn't continue.
Bottom Line
If you want to create consistent cash flows from great dividend yielding stocks, that have proven their ability to grow over time, take a closer look at Wells Fargo, US Bancorp, and American Express.
