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Tickers in this Article: TNH, AHT, CSE, BVF, KFN, TNH
For decades, blue chip companies with high dividend yields have been affectionately referred to as "widow and orphan" stocks because they represented mature, established companies that paid reliable dividends that widows and orphans could rely on to provide them with a steady income.

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 probably 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. Stocks with high dividend yields generally offer more downside risk protection than growth stocks. This is because the steady cash payouts these stocks provide give investors peace of mind when the going gets rough. When the market turns south, dividend-paying stocks typically do not fall as fast or as far as high-flying growth stocks that typically lack a regular dividend payout. (For more on this, check out How Dividends Work For Investors.)

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. With that in mind, here are five stocks with sizable current dividend yields that have a history of strong dividend growth as well:

Company Dividend Yield Market Cap (billion)
Ashford Hospitality
25.0% $0.402
Capital Source
21.5% $2.63
15.2% $1.58
KKR Financial
15.2% $1.59
Terra Nitrogen
14.8% $2.10

Terra Nitrogen Looks Great At First
Terra Nitrogen is a limited partnership with the general partner being a subsidiary of Terra Industries (NYSE:TRA). Terra produces the components of fertilizer for use in industrial and agricultural markets. Its payout ratio of 86% is a little high, but its current ratio of 1.7 looks good. Terra Nitrogen had record net income in 2007 of $206 million up from $46 million in 2006. This was an increase of 350%. Revenue in 2007 increase 50% to $636 million but cost of that revenue only went up 11.5%. First quarter 2008, ending March 31, saw sales up 36% to $174 million and net income is up from $35.3 million to $81.6 million. Earnings like that contribute to a P/E ratio of 9 which is well below the industry average of 22. (Find out more on financial ratios in Analyze Investments Quickly With Ratios.)

Reduction Incoming
Shares of Terra had a dividend last quarter of $4.20 creating a yield of almost 15% but anything that seems too good to be true usually is. A partnership agreement with Terra Industries, owner and controller of the general partnership, could substantially reduce the dividend paid to common shareholders. The agreement states that when quarterly dividends exceed certain levels, the common shareholders receive a lower percentage of distributions. The below chart is the easiest way to describe the tiered system.

Dividend distribution for Terra Nitrogen
Quarterly Dividend
Per Share
Common Shareholders
$0.715 99.0%
$0.715-$0.825 85.9%
$0.825-$1.045 75.8%
$1.045+ 50.5%

The difference does not completely go to the general partner and there are several other limitations, but the chart gives a basic understanding of the reduction in distributions to common shareholders. Once the dividend goes over $1.045 the general partner is entitled to a maximum of 48.5% of distributed cash. So, expect a drop in dividend payouts and a potential drop in share price from surprised holders. This could present a buying opportunity for investors looking for a good entry point. Share price is already down about 22% in the last three months.

Here Today, Gone Tomorrow?
Despite the cliché, you don't have to be a widow or an orphan to appreciate the staying power dividend-paying stocks can add to your portfolio over the long haul. A portfolio of stocks with high dividend yields may experience less price volatility than a portfolio built entirely of sexy growth stocks. It is important to note, however, 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 it altogether, a stock that was once considered a dividend darling can easily take a nasty tumble. (To learn more, check out Is Your Dividend At Risk? )

What do you think of dividend investing, and of Terra Nitrogen's prospects going forward? Join me (PeterAB) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.

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