Generally speaking, dividends are a good thing. However, the double taxation that dividends are exposed to does not sit well with many. Dividends are taxed at the corporate level, and then again on the personal level when they are paid out to investors. So yes, in this regard, dividends may not be the optimal capital allocation decision. Yet, the majority of the time, dividends are indeed a valuable use of corporate capital.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Capital Allocation
The truth of the matter is that a substantial portion of long-term capital gains comes from dividend payouts. And using company profits to pay dividends to stockholders creates discipline among the companies that issue them. Dividends are cash payments, and cash can not be manipulated. The payment of a quarterly dividend suggests that the company is generating the cash necessary to pay it. Also, managers are aware that many investors will dump shares if the dividend is eliminated. This knowledge reduces the likelihood that management squanders the cash on poor acquisitions.

On the flip side, should a dividend-paying company eliminate or suspend the dividend, that serves as a warning to investors that operations might be. So in weighing the pros and cons, it appears that the advantages of dividends outweigh the disadvantages. (For more, see The Power Of Dividend Growth.)

Three Huge Yields
Linn Energy (Nasdaq:LINE) is an oil and gas master limited partnership with an amazing 10% dividend yield. MLP's are in the business of owing stable oil and gas properties that produce stable cash flows. To maintain their tax efficient status, MLPs pay out most of their cash flows out to unit holders. Linn's yield is only half the story. The company also has one the best hedge books in the business. Over the next three years, nearly 100% of Linn's production is hedged at oil and gas prices at about current prices. This hedge book, along with the yield, makes Linn one of the most attractive MLPs in the business. Kinder Morgan Energy Partners (NYSE:KMP) yields under 7% without the quality hedge book.

If you're not averse to a company selling cigarettes, Altria (NYSE:MO) may be the most dependable dividend-paying stock in the market today. For decades, this titan has consistently paid a top tier dividend and delivered impressive total returns, year in and year out. Today's yield of 6.5% is among the best and the safest. And with a P/E ratio of 13, shares are cheaper, relative to overall market index.

With a 4.4% yield and a $16 share price, Pfizer (NYSE:PFE) looks very attractive, from both angles. Despite the patent loss on Lipitor in the next couple of years, Pfizer has a lot of drugs in its pipeline, even more so with the recent acquisition of Wyeth. And while you are waiting for this to happen, your earning nearly 5% on your investment. Pfizer is $130 billion company that earned over $15 billion in free cash flow in 2009.

The Bottom Line
Dividends are real, and they can be counted. A stock that yields 4% a year need only appreciate by 5% per annum over the long-run to produce a market-beating return. So, ignore dividends at your own expense. (For more, see Why Dividends Matter.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  2. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  3. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  4. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  5. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
Trading Center