For decades, stocks with high dividend yields have been affectionately referred to as "widow-and-orphan stocks" because they represent mature, established companies that pay reliable dividends that both widows and orphans could rely on. Although, in hindsight, the name probably could have been shortened to "widow stocks", as children from orphanages have notoriously underfunded portfolios.
Utility companies and industrial conglomerates are often placed in this category, but pretty much any large-cap company that has paid a sizable dividend consistently over the years can usually be counted on to continue doing so. (To learn more about the benefits of dividends, check out Dividends Still Look Good After All These Years.)
Dividends Don't Rock the Boat
Investing in dividend-paying stocks definitely has its advantages. After all, stocks with high dividend yields generally offer more downside risk protection than growth stocks or stocks that don't pay dividends. The steady cash payout these stocks provide gives investors peace of mind when the going gets rough. Dull dividend-paying stocks typically do not fall as fast or as far as high-flying growth stocks (that typically lack a regular dividend payout) when the market turns south.
By extension, a portfolio of stocks with high dividend yields may experience less price volatility than a portfolio built entirely of sexy growth stocks.
Consistency is the Key
But it is important to note that a regular dividend will only help to keep a stock's price stable as long as the dividend payment keeps getting paid out. If a company decides to decrease its regular dividend amount, or cease paying it altogether, a stock that was once considered a dividend darling can easily take a nasty tumble.
So, if you are looking to beef up your portfolio with some dividend darlings, usually the best place to start hunting is with stocks that have paid out increasing dividends consistently over a period of years. Generally speaking, the longer a company has paid out a high dividend yield, the more likely it is to continue doing so in the future.
Does your portfolio lack a solid dividend yield? Here are 5 dividend-paying stocks to snap up while their yields are high.
Dividend Yield (TTM)
5-Year Dividend Growth
Omega Healthcare Investors
Data as of market close on April 23, 2008.
Among these five potential dividend darlings, Jackson Hewitt has one of the more well-established business models and brand names. Founded in 1985, the company heads up a nationwide income tax return preparation business, sharing the bulk of the tax return market share with long-time rival H&R Block (NYSE:HRB).
In its three fiscal years from 2005 to 2007, Jackson Hewitt was able to increase its revenue by 26%, while padding its bottom line with an increase of more than 30% in net income. With Wall Street analysts expecting the company to average 12% annual earnings growth over the next five years, the stock's forward P/E ratio of only about 8 makes it enough of a potential bargain to warrant a closer look.
Dividends For The Long Run
Despite the traditional label, you sure don't have to be a widow or an orphan to appreciate the staying power that dividend-paying stocks can add to your portfolio over the long haul. For example, while consumer products giant Johnson & Johnson (NYSE:JNJ) currently does not have a terribly high dividend yield (only about 2.5%), it has been consistently increasing its annual dividend payouts for decades.
In fact, Johnson & Johnson has paid out $1.66 worth of dividends in the last 12 months. On that basis, a buy-and-hold investor who simply bought the stock in April of 1985 and held it for 23 years would now be getting a 100% annual return on his or her original investment solely from the annual dividend payout! (To learn more about the compound nature of dividend returns, check out The Power of Dividend Growth.)