Dividend Paying Stocks
What Dividend Stocks I Choose and How I Do it
I love investing in dividend paying stocks and have been doing it for years. You can invest in stable, mature, usually blue-chip companies that are able to pay out some of their earnings to the shareholders. Companies that have a history of paying increasing dividends are not likely to go bankrupt and stock dividends offer an almost guaranteed return, even when stock prices go down. In many years, a significant portion of the stock market's total return is from dividends.
Remember to not just look at the companies with the highest dividend yield because they are often paying dividends from borrowed money or increasing the number of stock shares and not from their earning. Choose only those companies with high dividends, and consider how much the dividends are growing over time and whether the dividend is sustainable by looking at the payout ratio. It's easier than you think to find quality companies that you can invest in safely.
My Experience with Dividend Stock Investing
A few years ago, I reached a place where I had saved up about $20 000 and I was interested in investing in the stock market. I did extensive research, looking at the various options. Eventually, I settled on dividend stock investing because it seemed not too complicated, not so risky and could offer good returns if done for the long term. I started investing about 2 years ago, and now have a steady stream of dividends coming in every month. It ranges from $200-400. I keep investing more money that I make from my job, as well as the dividends that I earn. I hope to grow this monthly income to over $1000/month.
You're a newbie and want to know the basics? Well, dividends are simply earnings that a company pays out to its shareholders. Most companies pay 4 times/year, at a set amount/share. The only fees for this investing strategy are the commissions that you pay to buy the stock (from $3-$20) and the same fee when you sell the stock. If you sign up with an online discount broker such as Sogotrade or Interactive Brokers, your fees will be minimal.
As with any investing, do your research first and act second. This site is a good place to start!
Resources for dividend yielding stock investing
Coca-Cola (KO): an excellent blue chip stock
We all know and love Coca Cola. It's one of the most iconic brands in the world. It was started in 1886 and is now present in over 200 countries. They've been increasing their dividends (earnings paid out to shareholders) for 48 years. Quite the track record!
Coca Cola was one of the first stocks I bought because it's such a famous, big company. And it's obviously not going to go bankrupt anytime in the near future. I like it for the following reasons:
1. Their earnings and cash flow generally increase from year to year. You want to buy a company that is making money.
2. The payout ratio for their dividend is low at 56%. You don't want to buy a company that is paying out too much of their earnings and not saving money for a rainy day or to invest back in the growth of their company.
3. They have a low amount of debt and are easily able to cover their debt obligations.
4. They have a long term plan. By 2020, they want to serve 3 billion servings/day. That's 1/2 the world!
The downsides? Not many that I can see. Just wait for the P/E (price/earnings) ratio to drop down below 15 or so and you'll have yourself a good deal if you buy and hold for the long-term, collecting your nice 2.7% dividend.
How to invest in Coca-Cola Stocks
Chevron (CVX): one of the best dividend paying stocks around
Chevron is an energy company that is well-known from its retail stores in the USA. It's been around since 1879 and has grown into one of the biggest companies in the world. Things I like about it:
1. It pays a nice 3.5% dividend, that has been increasing 10%/year for the past few years. This is all with a low payout ratio of 30%. Chevron should not be cutting its dividend anytime soon.
2. It consistently grows it's earnings and revenue (if we ignore the bad 2009 year due to low oil prices).
3.It not only engages in retail gas sales but has activity in exploration and refining, pipelines, chemicals, natural gas and technology. If one segment takes a downturn, the company should still be able to maintain it's profitability.
4. It has a low amount of debt and is has one of the nicest balance sheets among its peers.
5. Energy demand will only get higher in the future and Chevron looks well poised to take a large part of the market share. The future for the whole industry actually looks quite bright
At a P/E of around 10, Chevron looks like a buy. There's not a lot of downside that I can see, except for a major oil spill disaster. Buy for the long-term and collect those nice dividends.
Exxon Mobile (XOM)
A consistent Dividend Payer
We all know Exxon Mobile, a huge, diversified oil, gas and chemical company that operates around the world. It's one of the biggest companies in the world. Things I like:
1. Because it's so big, the chances of it going bankrupt are almost non-existent. Plus, demand for oil and gas is only going to increase in the future, which means higher profits for them.
2. Dividends have been increasing for 30 years. The yield is 2.45%, with a very low payout ratio of 30%
3. They have a strong balance sheet and are easily able to cover their interest payments.
4. They seem to be a very well-managed company, with talent and expertise in numerous areas.
Concerns: their revenue and earnings have decreased significantly in the past few years due to a drop in oil prices. However, they have rebounded for 2010.
With a P/E of 12, bright prospects for the future, and a safe, growing dividend, XOM is definitely a buy.
Time to buy Dividend Stocks
Intel (INTC): a Tech Company with Dividends!
Everyone has heard of Intel. Who hasn't seen the little logo and slogan "Intel inside" on almost any computer that they're used. In fact, they're the number one semi-conductor maker in the world. They put their chips in a wide range of things from health products to data processors. I recently bought INTC because the P/E ratio was extremely low for a tech company. Traditionally these kind of companies trade at 20, 30 times earnings or even higher.
What I like:
1. As with all stocks I buy, I like the dividend. 3%, with years of increasing dividends. Since 2004, the dividend growth rate has been an astounding 25% per year. And, the payout ratio is a low 33%. This gives me confidence that they'll be able to maintain that dividend for the foreseeable future.
2. While revenue and earnings were looking down for a few years, there has been an upward trend in 2010.
3. They have an extremely small amount of debt.
4. They are the world-leader in their industry. It usually is better to go with the biggest and the best, if you're looking at dividend paying stocks.
What I don't like? It's yet to be seen if they can make the transition away from desktops and laptops towards mobile computing. This will be the future and they need to become a bigger part of it. And their recent acquisition of McAfee was a bit strange to say the least. It remains to be seen whether this will be a fruitful partnership or not.
Anyway, the stock is cheap at an 11.6 P/E ratio. Looks like a buy to me.
Wal-Mart (WMT): the bluest of the blue chip stocks
Everyone is familiar with Wal-Mart, it's one of the biggest companies in the world. It was founded in 1962, and currently has 25% of sales internationally. While people are critical of Wal-Mart, it has brought lower prices to consumers all over the world.
Things I like:
1. Revenue and earnings have been consistently increasing.
2.They have a dividend yield of 2.2%, with a payout ratio of 30%. They've increased their dividend by 16% over the last 5 years.
3. They hold a reasonable amount of debt.
4. They are famous around the world for everyday low prices and they're often the first place people think of when they're planning on going shopping.
Things I don't like? They only have a profit margin of 4%, which is low but comparable to other retailers. With a P/E of 13.5 it's reasonably priced.
Motley Fool Stock Market Tip: Wal-Mart
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Johnson and Johnson (JNJ): offering a high dividend yield
We all know Johnson and Johnson for their bandaids and baby lotion but their consumer goods segment actually makes up less than 1/3 of their revenue. They are the 7th largest pharmaceutical company in the world and they also have a significant present in the medical devices world. JNJ is a stable, well-run, diversified company that should have a place in any dividend investor's portfolio.
Why I like it?
1.It yields 3.1%, with a modest payout ratio of 44%. They have increased their dividends for the last 47 years and look poised to do again for the next 47.
2. The diversification. Diversified companies are better able to withstand tough times than companies who are a one-trick pony. JNJ has 3 major product segments and 1/2 of their revenue comes from outside the USA.
3. Their revenue and earnings are steadily increasing each year.
4. The have a low amount of debt and their balance sheet is better than most of their competitors. They won't be going bankrupt in the foreseeable future.
Things I don't like? Nothing really. And the good news is that they're at a P/E of 12.8, which is quite reasonable
Kimberly Clark (KMB): A member of the dividend aristocrats
Kimberly Clark is an international paper company. They have products such as Kleenex, Depends and Huggies.
What I like:
1. They consistently grow their revenue and earnings.
2. They've been paying increasing dividends for 75 years. The current rate is 4%, with a payout ratio of around 55%. This is still under the 60% rate at which I would consider not investing in a company.
3. They've been around since 1872, and are well-diversified. Only 53% of their sales came from North America, and they have 4 main product lines ranging from consumer toiletries to health care.
What I don't like? Mainly that their balance sheet is not so squeaky clean. They have a lot of debt, but are well able to cover their liabilities so this shouldn't be a major concern.
Right now, they're at a P/E of around 14. While this is certainly not expensive, it's not a great bargain, so I'd wait for that number to fall a little bit.
Fundamental vs. Technical Analysis
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- The Dividend Monk
An excellent guide to help you choose the best dividend paying stocks.
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Medtronic (MDT): one of the best dividend paying stocks for 2011
This company has been around since 1949 and is the world's largest independent medical tech company. They basically sell medical devices, ranging from spinal to cardiac rhythm devices in 7 different divisions.
Things I like:
1.Their revenue and earnings show consistent increases over the past few years.
2.They are well diversified, with over 41% of earnings happening outside of the USA, and they have 7 divisions with a wide array of products.
3. They pay a dividend of 2.7% and have increased it by 19% over the last 5 years.
4. They have a strong balance sheet and are adequately able to cover their liabilities.
5. With the new insurance program in the USA, more people should be coming into the medical system, which will mean increased sales for medtronic.
Things I don't like? Not much, but there is always the potential for litigation. And at a P/E of 12, it looks like quite a good deal at the moment.
How to Build a Diversified Dividend Income Portfolio
Did you know that Warren Buffet LOVES Dividend Paying Stocks?
- Check out Warren Buffet's Portfolio
Lots of excellent stock ideas here. It can't hurt to pick the brains of the smartest investor around.
Lockheed Martin (LMT): a top dividend paying stock
Lockheed Martin is a weapons manufacturer that provides products for the US government and internationally as well. They are the biggest company of its kind.
Things I like:
1.They've been raising their dividends for the past 8 years at a rate of 20%/year, while maintaining a low payout ratio of 34%.The dividend is at 4.4% now.
2. LMT is the biggest and best in their industry.
3. Revenues look to be increasing but earnings are staying the same, or seeing a slight decline.
4. While they do have some debt, they're adequately able to meet their obligations.
1. While LMT is diversified over 4 segments (all approx 1/4 of their business), 85% of their revenue comes from the US government. Everyone knows that US budget cuts will eventually happen and this could have a negative impact upon this company. Also, when the US is not fighting two wars, weapons expenditures will be much lower. There's also the risk of falling out of favor with the US government for some reason.
2. Their operating costs for their business are high and they have enormous pension obligations.
3. Insiders and institutions have been selling lately. When the "smart money" sells, you should take notice.
So is it a buy? WIth a P/E of less than 10, it certainly is cheap. However, it's probably so cheap because of all the uncertainty that surrounds this industry and what their future will look like. On the upside, they are highly committed to providing return to their investors through dividends and with such a low payout ratio, the dividend looks safe for many years to come.
Bank of Montreal (BMO): A Canadian dividend stock play
BMO, in one of the big 5 Canadian banks with operations mainly in the USA and Canada. It's traded on both the NYSE as well as the TSE. They're diversified across all sectors of the finance/banking industry. Canadian banks are generally thought to be more stable than their American counterparts because of government regulations that prevent them from taking as much risk. None of the Canadian banks were hit by the sub-prime housing crisis that all the US Banks experienced.
Things I like:
1. A nice 4.85% yield. It's been increased for 14 of the past 17 years, and sometimes twice/year.
2. At 12, they have the lowest P/E ratio of the Canadian banks, mostly due to their recent purchase of Marshall & Ilsley, in concern of the sub-prime debt they were now inheriting.
3. They have room to increase their dividends in the future.
Things I don't like:
1. They have a payout ratio of 55%, which isn't bad when compared to other industries. But, among the Canadian banks, it's one of the highest.
2. Earnings are a bit sporadic, but generally increasing.
BMO has experienced a reduction in price due to their recent purchase. It's on sale and time to buy! Their P/E is low and dividend is high.
They are well poised for the future, with room to grow their dividend. And as their recent acquisitions become integrated, their share price could see some appreciation as well.
McDonalds: An excellent company with big dividend increases every year
McDonalds is the biggest fast-food restaurant in the world and one of the biggest and most successful companies in the world. They have over 31 000 restaurants and operate in 118 countries.
Things I like:
-Almost everything! Revenue and earnings have been steadily increasing for the past few years.
-Their net profit margin is 20%, much higher than their competitors.
-The dividend is 3.25%, and has been raised an average of 30% over the past 5 years. Their payout ratio is low.
-They aren't cheap right now.
-Their business is food, so they're subject to world food prices, which could hurt their margin.
It's definitely a buy, at a P/E of less than 15. In fact, I'd even be willing to buy at a P/E of 17 or less because it's such a strong company with impressive growth prospects.
A Short Disclaimer
Please do your own research before buying any stock. I recommend a site like Yahoo or Google Finance. If you are a beginner, consult a qualified professional financial adviser.