Dividends can all look alike. That $0.75 per share one company pays you each quarter looks a lot like any similar sum. But those seemingly identical payouts can vary wildly in their growth rates and stability.
The case for dividends
In a recent Wall Street Journal article, Ben Levisohn made a strong case for dividend investing. As of this summer, dividend-focused mutual funds have taken in $12.6 billion this year, almost four times the total inflow for 2010. Stock funds in general have seen outflows of roughly $25 billion.
Indeed, dividends look particularly attractive now, with 10-year Treasuries are yielding less than 2%, and five-year U.S. bonds yielding less than 1%. With inflation historically averaging around 3% annually, both these Treasury options could actually leave you poorer in the long run. Meanwhile, exchange-traded funds such as the iShares Dow Jones Select Dividend Index ETF (DVY) and the SPDR S&P International Dividend ETF
A look at individual stocks makes the case for dividends even clearer. My colleague Morgan Housel has pointed out that since the late 1960s, Altria
Clearly, dividends can contribute powerfully to a portfolio. But if you're looking at individual dividend-paying stocks, keep your needs and goals in mind. For example, are you seeking safety or growth?
Safe-ish and growing
Many dividend payers will offer some degree of both safety and growth. No stock is ever 100% safe. But most companies are paying out dividends because they have relatively predictable cash flows and believe they won't have trouble covering their dividend obligations.
In addition, most companies are in business to grow. They have shareholders to reward, and they hope and plan to be generating considerably more cash in the years to come, and to increase their dividend payouts regularly, as so many companies do.
Safety vs. growth
Still, some companies have more predictable futures, and some are growing much faster than others. If you're an older investor or one with a more conservative temperament, and you don't need to beef up your nest egg considerably, you might favor "safer" companies. To find these, you might focus on industries that don't change too rapidly, such as consumer staples. Think energy, foods, garbage, and even insurance. Johnson & Johnson
You can also look for low debt levels and low betas, since both can herald steadier companies. (Beta reflects how much more or less volatile than the overall market a stock is; a beta greater than 1.0 reflects greater volatility, and vice versa.)
If you're a younger investor, or you have a greater tolerance for risk, you'd do well to seek growth. For faster growers, look at more tech-heavy companies riding the boom in solid-state memory or cloud computing, among other waves. Patent-rich Qualcomm
Lots of big foreign companies are also offering tempting yields, and are serving more rapidly growing populations. Telefonica
With fast growers, it's also good to see relatively little debt, as well as accounts receivable and inventory levels growing no faster than revenue. With all portfolio candidates, it's always best to examine as many measures as possible to get the fullest picture. Be especially diligent with high-yielding stocks, as they're sometimes in trouble.
As you seek dividends for your portfolio, make sure you're getting the kind that will best meet your needs.
Longtime Fool contributor Selena Maranjian owns shares of QUALCOMM, National Grid, and Johnson & Johnson, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Telefonica, Altria Group, Johnson & Johnson, and QUALCOMM. Motley Fool newsletter services have recommended buying shares of National Grid and Johnson & Johnson as well as creating a diagonal call position in Johnson & Johnson. 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. The Motley Fool has a disclosure policy.