7 Dividend Divas

With uncertainty surrounding the durability of the economic recovery and Europe's lingering sovereign debt problems, volatility is back in full force. In stormy seas, it's important to have dependable income streams from dividend-paying stocks to steady your portfolio.

Stocks such as Cellcom Israel (NYSE: CEL) and Omega Healthcare Investors (NYSE: OHI), which yield 10.9% and 6.8%, respectively, can give you a more stable return in a volatile market.

Although 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. Mature companies that still have more cash than they need are some of the strongest businesses out there.

What's more, companies took steps during the depths of the recession to cut payroll and other costs and widen their profit margins, equipping them with a lot of cash.

In fact, nonfinancial corporations now hold a record $1.8 trillion in cash on their balance sheets as of the end of March, according to the Federal Reserve. That means corporations are poised to either invest that cash, or return it to the shareholders in the form of a dividend. In fact, that's already happening. Companies that had cut dividends, like General Electric, are starting to raise them again. Starbucks and Eaton have also ramped up their payouts to shareholders this year.

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 searched 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 165,000-member CAPS community, to pick among those most likely to outperform going forward.

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

Source: Motley Fool CAPS.

Dividends are one way to search for quality companies, but it's important 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 higher than 8% for common stock. If the yield has jumped up 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. 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 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.