Any long-term investor can appreciate the value of a dividend. Over time, the dividend becomes a bigger factor in the total return of an investment. Mathematically speaking, assume a share of stock is bought for $10 and yields 3%. Five years later the shares trade for $20 and yield the same 3% due to increased dividend payments. For the investor who purchased shares at $10, her effective yield is now 6%. Over the course of 10 years or more, the dividend effect on your portfolio becomes truly significant.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Dividends Matter
Dividends do matter but only when they can be counted on to be paid consistently. Often, an abnormally high yield is a market signal that a dividend may be temporary. Yet the market is not always right. During the recession, quality energy master limited partnerships were yielding 15% and up because investors were selling shares as the price of oil and natural gas were declining (dividend yields rise when stock prices decline and vice versa). Yet energy MLPs had hedged production at energy prices that enabled them to maintain distributions. When investors caught on, shares went soaring.

SEE: 10 Dividend Aristocrats

A quality balance sheet, however, is the simplest way to determine the safety and consistency of a dividend. Common stock dividends are paid after bondholders and preferred stockholders. A business with little or no debt is obviously in great shape to continue paying common dividends.

Qualifying Candidates
This article focuses on a simple screen looking for profitable stocks that were sporting dividend yields of around 4%, or double that of the 10-year US Treasury yield. In addition, we're only looking for stocks whose balance sheet showed a cash balance that was equal to or greater than the debt balance.

Meridian Bioscience (Nasdaq:VIVO), a maker of diagnostic test kits used in lab tests currently yields 3.9%. The company boasts a market cap of $806 million, no debt and $24 million in cash.

SEE: The Power Of Dividend Growth

PetMed Express (Nasdaq:PETS), an online seller of pet care products, boasts a yield of 5% and a cash-rich balance sheet to go with it. The company is debt free and has $57 million in cash.

Terra Nitrogen (NYSE:TNH) is a limited partnership that sells and markets nitrogen fertilizer products to agricultural customers. Shares yield about 8% and the company is benefiting from the favorable outlook for agricultural commodities.

Homeowners Choice (Nasdaq:HCII) is a small Florida insurance business that certainly appears cheap from various angles. Shares yield 4.9%, and at $17.07 a share, they are well below the book value of $10.29 a share.

SEE: Digging Into The Dividend Discount Model

The Bottom Line - Buyer Beware
One of the reasons the above businesses exhibit such attractive yields is the share price has declined in 2011 thereby increasing the yield. None of the businesses are facing any significant issues so today could present a decent entry point. But of course, dividends don't mean much if you buy a business with a poor long-term future.

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

Related Articles
  1. 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.
  2. 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.
  3. 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?
  4. 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?
  5. 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?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center