Following the gut-wrenching financial meltdown, housing bust, and worldwide recession, investors are finding their way back to dividends. And if you ask me, that's a great thing because, as I recently pointed out, research has shown that dividend-paying stocks simply perform better over time.
Like the world-weary prince that's finally found his princess, the last thing investors want to see now is the dividend payers in their portfolio slash their payout. While there are exceptions, in most cases, a stock that loses its dividend provides a double-whammy for your portfolio because not only have you lost your income stream, but the stock has likely been battered by the market.
So how do you avoid picking stocks that will put a dividend in your pocket one day and have you grasping at air the next? Here are three red flags to look out for.
1. High debt load
Debt can help juice returns, but a hefty debt load can be the bane of a dividend investor's existence. Since debt holders always come ahead of common shareholders, when it comes to getting paid, if there's not enough money to go around the lenders will get the loot while stockholders get a nice, tall glass of shut-the-heck-up.
The problem is typically worst when it comes to companies in a cyclical industry. When the economy is good, they can take on a whole bunch of debt and appear to have the wherewithal to pay the interest and then, BAM!, the cycle turns and shareholders are left with bupkis. Ford
Right now, investors might want to keep an eye on Ferrellgas Partners
2. Monster yield
Unlike prospective capital gains, dividends yields are out there for everyone to see. So why in the world would anybody pass up the opportunity to invest in a company with a yield of 8% or even 15%? Easy, because they don't believe that the company will actually maintain its payout. And you know what, they're often exactly right.
Of the companies with a market cap above $500 million and a dividend yield of 8% or better at the beginning of 2001, a full quarter of them have since completely eliminated their dividend.
Of course while it can be a gamble to chase hefty yields, it is one that has the propensity to pay off nicely when the market is wrong. For example, at the beginning of 2001, Nationwide Health Properties
3. It's in a troubled industry
Not all that long ago, investors collected a dividend from both The New York Times Company and Eastman Kodak
The Washington Post Company has a much more diversified business than its name suggests, but Gannett's 1.2% dividend could face the same fate as that of The New York Times.
Looking outside the newspaper industry, landline telephone companies like CenturyLink
Dividends that stick
Now that you know a few dividend red flags to look out for, why not check out a few dividends worth owning? My fellow Fools have put together a special report -- "13 High-Yielding Stocks to Buy Today" -- and you can get a free copy by clicking here.
The Motley Fool owns shares of Chimera Investment and Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.