Well-established, dividend-paying companies have traditionally been referred to as widow-and-orphan stocks, because they provided their stockholders with a reliable dividend stream that could be counted on as a steady income. But while they may be given such a label, the fact of the matter is that many types of investors can probably improve their portfolios by including companies that make consistent dividend payments to shareholders. (To learn more about the benefits of dividends, check out Dividends Still Look Good After All These Years.)
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Advantages of Dividends
For starters, the obvious benefit of regular incoming cash received from dividend payouts should not be overlooked. Periodic dividend receipts not only provide stability to a portfolio's annual rate of return, but also provide emotional support and peace of mind for the individual investor. As the market turbulence of the past several years has illustrated, stocks can be prone to drastic short-term changes in value. When prices do happen to drop, dividend-paying stocks can often keep a portfolio on track - and keep an investor from succumbing to panic. (For more on this, check out How Dividends Work For Investors.).
Consistency Is Key
While a portfolio constructed of stocks paying sufficient dividend yields will likely experience less price volatility than the overall market, it is important to note that this benefit exists only as long as the dividends are being paid. If, for whatever reason, a company decides to decrease or stop its dividend payments to shareholders, its common shares no longer carry the advantages of a dividend-paying stock. (For more insight, see Your Dividend Payout: Can You Count On It?)
Thus, it is important for the individual investor to not only look for stocks that are paying high dividend yields now, but to also to attempt to select those that are likely to continue to consistently pay dividends for the foreseeable future. While it's impossible for the individual investor, or anyone for that matter, to predict the future, a good starting point is to focus on companies that have consistently paid stable, progressively increasing dividend amounts for many years. Fortune-telling aside, the longer a company has paid sizable dividends to shareholders, the better the chances it will continue to do so in the future.
With that in mind, here are five stocks that have both a relatively high current dividend yield as well as a history of dividend payout increases:
|Company||Dividend Yield (TTM)||5-Year Dividend Growth|
|Barnes & Noble
|World Wrestling Entertainment
|Data as of market close July 20, 2010|
Dividends for the Long Haul
Of the companies in this list, Barnes & Noble provides an interesting example of a divided-paying stock that offers both stability and potential for substantial returns to the individual investor. The stock has sold off sharply as of late, and is currently priced in the $12 range, while it sold for as much as $24 per share as recently as April of this year.
As a result of such a steep sell-off, the stock's dividend yield has increased substantially, and is currently sitting at 8.2% on a trailing 12-month basis. Founded in 1986, Barnes and Noble will likely be around for many years to come. As an additional form of stability, the stock generated $3.92 of levered free cash flow for shareholders in its trailing 12 months, which at a price level of $12.50 per share equates to an enormous free cash flow yield of 31.4%!
The Bottom Line
While dividends aren't the whole story when considering whether to buy a stock, a relatively high current dividend yield and solid history of consistent dividend payouts certainly increases a stock's attractiveness. Provided the dividend amounts remain stable and are not reduced in the future, they can be a rare source of support for the individual investor in an otherwise turbulent market. (For related reading, see The Power Of Dividend Growth.)
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