2009-04-25

Add high-quality Dividend Stocks to your portfolio

Dividend Stocks may sound like a boring option to investors. But in times of economic turmoil they may prove useful after all. According to Gabriel Yap, senior dealing director of brokerage firm DMG & Partners Securities, dividend stocks tend to pay higher dividends relative to the market. “If you're talking about Asia for example, the dividend yield is usually about three, three-and-a-half per cent. So any stocks that basically pay higher than that benchmark will tend to be considered as higher dividend yield stocks," says Mr Yap.

Build the next investing dynasty
These long-haul outperformers can help you build your fortune, as studies from investing gurus such as Jeremy Siegel have shown time and time again. At the same time, they can provide a solid defense against crazy market conditions.
Enterprise Products Partners (NYSE: EPD), for example, has beaten the S&P 500 by 37 points since March 2006, and it is currently rewarding investors with a 7.8% yield. Or consider VF Corp (NYSE: VFC), which has topped the S&P by 41 points since June 2006, atop a current 3.4% yield. While these stocks happen to be Income Investor recommendations, you don't need to be a subscriber to get these great gains.

Search for the best dividend-paying stocks around
Here are several dividend picks :

If you like what you see, but want more, you can run this screen for yourself. While these are not formal recommendations, they're a great place to kick off further research and potentially add some dividend excellence to your portfolio. In fact, I'll even kick you off with some thoughts on Illinois Tool Works.

Does my dividend have a glass jaw?
The last thing we want in a dividend paying company is the risk that the company will fall off a cliff and have to pull back its dividend. This usually ends up being a double whammy because not only do you lose your dividend payout, but many of the dividend-loving investors that own the stock will run for the hills, causing the stock price to fall.

With that in mind, there are three places that I immediately tune into when kicking the tires of a dividend payer -- dividend history, balance sheet strength, and cash flow.

The dividend history for Illinois Tool Works definitely starts us off on the right foot. Not only has the company been consistently been paying dividends for a couple of decades, it has been consistently raising its dividend for a couple of decades. Over the ten years ending in 2008, ITW jacked up its annual payout from $0.27 per share to $1.18 per share, for average annual growth of about 16%.

The company's balance sheet, which has a debt-to-equity ratio just over 50% and above $1 billion in cash and equivalents, is pretty middle of the road, but certainly not concerning. Its cash flow, on the other hand, looks great, with free cash flow production well above the dividend commitment.

What the bulls say
Thanks to a $90 million non-cash write-down to goodwill and related intangibles, Illinois Tool Works' first quarter didn't look too hot. It also has avoided providing guidance past the next quarter given the uncertainties of the current economy. But the company's second quarter is expected to be better than the first, and even with the loss showing on the income statement, ITW still managed to produce over $350 million of free cash flow during the quarter.

It's little wonder that ITW's stock has had a good reception on CAPS, even if it isn't quite at five-star status. CAPS member Quicksilver121 outlined last month why the company is able to prosper despite its large number of different business units:

[Illinois Tool Works] is a large company that allows their business units to manage their future. ITW supports the units with guidance (80/20 philosophy) and capital not bureaucracy. This allows their units to stay focused on what they need to do to grow their business. This along with strategic acquisitions will allow ITW to outperform in the future.

Get into the action
You can check out who else has been bullish on these stocks, as well as chime in with your own thoughts. You may also want to check out a few of the other top rated dividend payers above while you're there.

Dividend stocks could help you transform your portfolio from the Bad News Bears to the Dream Team. And really, could you argue with having Michael Jordan, Magic Johnson, and Sir Charles Barkley help your portfolio chalk up wins?

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