Dividend Investing Tips

| November 2, 2015 | 0 Comments

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He was wearing a Yankees cap, a crisp Brooks Brothers tie, and an Armani Collezioni Core Gio Two-Button suit.

“Just give it to me straight,” he said in a voice shaped by serious net worth.  “What are the three things you look for in dividend stocks?”

It was a chance encounter at a busy restaurant in Terminal 1 at LAX where the tables were jammed together like seats in economy class.  He overheard a phone call I was having with my editor.

Exactly how he figured out I wrote about dividend stocks remains a mystery.  I guess he was a pretty good eavesdropper.

But finding the best dividend stocks doesn’t have to be a mystery.

Sure, we will always invest in a market where not much of anything is a given.  We can’t predict the market’s direction and we will always be tossed surprising developments.

Economists didn’t forecast the financial meltdown in 2008.  Experts didn’t tell us to strap in for the collapse in crude oil prices.  And more often than not, all you can depend on is your own common sense to make a safe investment.

So let me tell you what I told the mysterious guy at LAX.

Let me “give it to you straight” and reveal the three things I look for in dividend stocks.

Dividend Stocks Essential #1:  Good Management

Let’s strip it all down to the bare bones basics.  You only get paid a dividend when a company makes more money than it needs.

The company needs to pay its employees, its bills, pay down its debt, cover operating expenses, capital expenditures, and maybe set some cash aside for a rainy day.

It might also need to sock some money away to fund a future acquisition, or to expand.

So there are plenty of places for the money to go before we can expect to be paid a dividend.

And obviously, there’s got to be money coming in.  Sales need to be higher than expenses.

So, what’s the best way to try and make sure all this happens?

Good management.  Management that knows how to make money, spend money wisely, lead the business, and grow the profits.

How do you know if a company is well managed?

It’s not easy.  Sins can be covered up.  Artfully hidden balance sheet time bombs can be ticking away.

Read the CEO’s letter to shareholders in the annual report.  Decide if what he says makes sense at a very basic level.  If the company has a challenge, is he addressing it head on and explaining his strategy for fixing it?

Do you like the direction he plans to lead the organization?  Is he vague or specific?  Does he accept responsibility for previous problems, or does he gloss them over?

Go to the financials.  Look at how money is being spent.  Is the management team running a tight ship?

How much are expenses going up?  Are they growing more quickly than revenues?

And when you look at the numbers, zero in on the profit margin.  You want to see if the margin, the percentage of profit, is rising or falling.

When you see margins that aren’t growing, chances are you see a management team that’s not getting the job done.

And when profit margins aren’t growing, sooner or later, the dividend will be in trouble.

Dividend Stocks Essential #2:  A Good Track Record

Dividend stocks with good management teams tend to come with a pretty good track record.

These companies make it through rough times.  They continue to pay the dividend – no matter what.  They look ahead, and they adapt to changing business environments.

For example, this year, we’ve seen the surge in strength of the U.S. dollar make it tough for companies that do a lot of business overseas.

Companies with a good track record aren’t strangers to this sort of disruption.

A great way to find the best dividend stocks is to look at the Dividend Aristocrats.  These are big companies with terrific track records when it comes to paying dividends.

These companies have paid a growing dividend for at least the past 25 years.

When the dividend is cut, the company is tossed off the list.  Track records matter.

So you won’t find well-known companies like General Electric $GE on the Aristocrats lineup because GE cut its dividend a few years back.

But here’s what you will find.

Little-known, but fairly large companies like Nucor $NUE, Leggett & Platt $LEG, and Illinois Tool Works $ITW.

When you look at companies like these, you’ll find the best dividend stocks for a rainy day.

Dividend Stocks Essential #3:  A Simple Way To Keep Making Money

Will marketers who want to advertise on mobile devices still be spending a billion dollars a month with Google five years from now?

Tough to say.

Will people still be using toothpaste and laundry detergent in five years?

That’s probably a safer bet, and it’s why Procter & Gamble $PG has been paying a growing dividend since 1957.

Take a look at how the stock has done over the past 20 years…

$PG 20-year chart reveals one of the best dividend stocks

I’m giving you this 20-year chart so you can get a feel for the long-term ups and downs.

Do you see the hit Procter & Gamble took in 2000?  The stock lost half its value in just a few months.

But it kept paying the dividend.  And it kept on selling toothpaste and laundry detergent.

If the Procter and Gamble stock takes another hit like it did fifteen years ago, we should feel fairly comfortable with its ability to rebound.  The company knows how.  Rough waters will not be uncharted waters.

Procter and Gamble competes in a simple business.  You don’t need brilliant engineers like the people working for Google.  But you do need the ability to understand your customer if you’re going to be profitable in the consumer packaged goods business.

Understanding customers, and being in front of trends, isn’t always easy.  But companies like Procter & Gamble know how.

That’s why $PG is one of America’s top dividend stocks.

A few other fairly simple businesses with solid dividend paying stocks…

Coca-Cola $KO and PepsiCo $PEP.

Coke has been paying a growing dividend since 1963 and Pepsi since 1973.

Simple Companies Can Give You Dependable Dividend Stocks

And it can be simple for you to find the best dividend stocks when you look for the three things I look for.

Good management, a good track record, and a straightforward business model.

That’s what I told the guy who cornered me in Terminal 1 at LAX.

And by the way…

That Armani Collezioni Core Gio Two-Button suit he was wearing…

$1,995 off the rack at Saks Fifth Avenue.


Paul Duke

Note:  Paul Duke writes and edits DividendStocksResearch.com.  Sign up for our free dividend reports and dividend newsletter at https://www.dividendstocksresearch.com/free-sign-up.  We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.

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Category: Dividend Stocks To Buy?

About the Author ()

Paul “Dividend” Duke is a veteran investor with a longstanding interest in dividend stocks. He brings a balance of both technical and fundamental analysis to his work, and focuses on opportunities that provide safety, capital appreciation, and income.

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