Will These 3 Monster Dividends Be Around Forever?

In much the same fashion that my grandparents eschewed risky investments after the Great Depression, today's investors are favoring dividend-paying stocks far more than their more speculative brethren.

And that's for good reason; study after study has shown that dividend reinvestment is the difference between an average retirement portfolio and a truly great one.

But a big dividend alone isn't enough reason to buy a stock. Below, I'll show you three monster dividends and how to evaluate their health. At the end, I'll offer you access to a special free report giving you the names of nine rock-solid dividend stocks.

Today's finalists
I scoured across three different industries to find some of the most tempting dividends available today. Below are the three I found, their yield, and what they do.

Source: Yahoo! Finance.

Having grown up in Wisconsin, I'm very familiar with Roundy's different chains of grocery stores -- primarily the Pick 'n Save model, but also Copps, Rainbow, and Metro Markets. The company was just brought public this year and has had mixed results thus far. Though the declaration of the dividend was welcome news, the company lowered guidance in mid-May, saying same-store sales would be negative over 2012. A weakening underlying business is never a good sign, and it's something to keep in mind as we evaluate the strength of Roundy's dividend.

Frontier Communications has seen better days. The company's stock is down a whopping 56% over the past year. With a focus on phone and Internet services in rural areas, Frontier has seen diminished returns on its expensive integration with former Verizon resources. The company saw 8% of its combined business and residential customers dump the company's services over the past year. As with Roundy's, this is important bad news to keep in mind while evaluating the dividend.

Finally, Enerplus is a different beast than the previous two. The company is actually a trust set up to pay its shareholders outsized dividends. The money that comes in is from the development of both oil and natural gas plays in North America. The reasons shares are down almost 60% over the past year is the same as it is for all natural gas plays: the record low prices for their commodity. That doesn't mean things couldn't turn around, but there are definitely risks involved here, too.

What about dividend health?
Having established that all three of these stocks have some weaknesses in the underlying businesses, we'll examine the health of their dividends. There are three primary ways to do this. First, we'll check to see how much of the company's earnings is used to pay out dividends.

But because earnings don't actually represent cash coming out of the company's pockets, we'll examine how much free cash flow is used to pay out dividends as well. Ideally, a company should be using less than 80% of its cash to pay dividends. This lets the investor know that the dividend is sustainable and that it can weather a slight economic downturn.

The final metric is dividend growth. Though the past isn't a perfect predictor of the future, companies that grow their dividend steadily are likely to continue doing so.

Source: Company SEC filings, Dividendinvestor.com, Yahoo! Finance, all using trailing 12 months. *Assumes continuation of dividend at current rate. N/A = not applicable. NM = not meaningful; Enerplus had negative free cash flow.

As you can see, Frontier and Enerplus are showing lots of warning signs. Enerplus not only has negative free cash flow, but it worsened from a loss of $43 million in the first quarter of last year to a loss of $250 million in this year's first quarter. With numbers like these and a historically shrinking dividend, you'd be better off staying away from both companies.

And though Roundy's actually looks pretty healthy from a free-cash-flow standpoint, I still think there is some vulnerability here. The company's stores dominate the Wisconsin landscape, and currently have the largest market share in the state's major cities.

While some may view that as a good thing, I think it means the company is ripe for disruption. The company is already showing negative sales trends in same-store sales. And as competitors like Whole Foods move in and offer a distinctly different experience, there's nowhere to go but down for Roundy's business.

A better way to find dividends
Hopefully I've been able to show that there's more to dividend stocks than just their yields. If you'd like access to a report that highlights nine dividend stocks I do believe in, check out "Secure Your Future With 9 Rock-Solid Dividend Stocks." Inside, you'll get the names of nine companies our top analysts believe will be dominating -- and paying shareholders -- for years to come. Get your copy of the report today, absolutely free!