How to Invest in Dividend Stocks
Written by: David Peltier
Tickers in this article:
CHK CVX DOV LINE PG XOM
NEW YORK (TheStreet) -- When you're evaluating a dividend-paying stock, your primary focus has to be the viability and sustainability of the dividend itself. Not rain nor sleet nor dark of night should stand a chance of keeping that courier from delivering a payment to your account every year.
The clearest danger to a dividend is a lack of cash flow. When a company has weak cash flow, the dividend is among the first costs to be cut -- because this at least allows the company to appear to be bolstering that key metric. But a dividend stock that stops paying its dividend is of little value to anyone's portfolio.
For example, in the energy sector, companies such as Chesapeake Energy and Linn Energy
were forced to eliminate their dividends recently, while industry bellwethers, Chevron
and ExxonMobil have maintained, if not increased, payouts.
How do you find a "safe" dividend? Seek out companies whose operating earnings and cash flow can cover their annual payments at least two times over. It is possible, in the near term, to raise capital through debt or equity offerings to prop up dividends, but most companies would not sustain this practice for more than a quarter or two.
It also helps to take a look at a company's dividend history. It's impossible to predict the future from the past, but some companies have exhibited a strong tendency to raise their payouts annually. For example, Dover
and Procter & Gamble
have each updated their quarterly dividends for 59 consecutive years.
It's also wise to seek out yields that are trending toward the higher end of historical ranges.