It's tempting to think of a company's past performance as a reliable barometer of its future. By that logic, a company that's raised its dividend payments should arguably continue to do so.
But beware of putting too much stock in antiquity -- past performance is no guarantee of future results.
For evidence, look no further than the start of our current ongoing recession: In 2008, 62 companies out of the S&P 500 slashed dividends; in 2009, another 90 followed suit. Bank of America alone did away with $37 billion in dividends in 2008. Other companies have opted to suspend payouts altogether until their financial health improves.
So how do you minimize the risk of investing in a dividend stock that's about to end its winning streak? You may want to do focus on the companies that have historically seen solid profitability.
Because the more profitable a company, the greater its capacity to stay true to its dividend target -- well, at least in theory. Lest we forget, history doesn't always repeat itself.
To create the list, we started with a universe of high profitable dividend stocks -- companies that have managed to increase their net profit margins over the last 12 months.
In addition, all of these companies have significant current assets relative to current liabilities -- meaning that they are liquid enough to cover their ongoing expenses (which increases the stability of the dividend).
A word of warning: If a stock offers a high dividend yield, it often signal trouble at the company. The dividend yield, after all, is calculated by dividing the annual dividend by the current price -- if the price collapses due to a fundamental weakness in the company's outlook, the dividend yield is going to shoot higher.
So please be careful before considering any of these investments. Use this as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
List sorted by dividend yield.
1. CTC Media
3. El Paso Electric Company
4. Calamos Asset Management
5. Analog Devices
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen does not own any of the shares mentioned above.
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