High Dividend Stocks Revealed

| July 27, 2015 | 0 Comments

warningHere on the beach in Southern California, I love to watch the tide.

All the bizarre forces at play, gravitational forces triggered by the moon, the sun, and the earth’s rotation… much more refreshing and inspiring than a stock chart.

But even with their predictability, the tides are as mysterious as the stock market, and if the mysteries of the stock market don’t keep us humble, nothing will.

It’s like John Bogle, founder of Vanguard Funds, says…

“Who knows what will do best? I don’t even know anybody who knows anybody who does.”

So we get up each day and give it our best shot.

We study the work of investors who achieve success, guys like Burton Malkiel.

In 1973, the Princeton Economics Professor wrote a wonderful book called “A Random Walk Down Wall Street”.

Profesor Malkiel is living proof that Ivy League economics professors aren’t all a bunch of stuffed shirts.  He once wrote…

“If you bought $1,000 worth of Nortel stock one year ago, it would now be worth $49.  If you bought $1,000 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, and traded in the cans for the nickel deposit, you would have $79.  My advice to you… start drinking heavily.”

So when we head off in search of the best dividend stocks for high yield, we check our egos at the door.  We try to discipline ourselves to stick to the rules we figure will keep us out of trouble.

I’ve got a collection of these rules, including a handful of dividend investing secrets that work well when it comes to protecting your money.

High Dividend Stocks For The Careful Investor

You should search for high dividend stocks with extreme care.

There’s so much that can go wrong, especially with the dividend stocks where a company is under stress to pay the dividend.

This is why you always want to watch the dividend payout ratio.  The lower, the better.

High dividend stocks usually haul the dangerous baggage of high dividend payout ratios.

So when you look at the highest dividend paying stocks, and you find one with a dividend payout ratio of less than 30 or 40%, you’ve got the green light to look at the stock more carefully.

It’s easy to come up with a list of the highest yield dividend stocks.  It’s tougher to carve out the stocks with decent dividend payout ratios.

Let me show you how easy it is to find the highest yielding stocks.

Just do a Google search and you’ll have all kinds of dividend stocks.  Most of them will bring Professor Malkiel’s advice to mind.  Here’s a prime example…

Meet The High Dividend Stock that Pays An 86.5% Yield

Earlier this summer, I was checking out North Atlantic Drilling Limited $NADL.  It was paying a 66.2% yield.

These days, the yield is 86.5%.

Tomorrow?  Who knows if $NADL will even be around.

North Atlantic Drilling was trading at $9.65 a year ago.  Now it’s at $1.05.

No wonder the yield is so high.

One of three things will happen.  North Atlantic Drilling cuts the dividend, the stock price edges back up which pulls the yield back down, or the company goes out of business.

Like any of those possibilities?  Any other scenarios you can think of?  Well, the stock might continue to trade around a dollar and your yield might still be secure, but who knows how long this could last?

Dividend stocks like North Atlantic Drilling pump your portfolio full of risks you don’t have to take.

And here’s another risk you don’t have to take.

Avoid High Dividend Stocks That Don’t Have A History

Track records matter.  A company that manages to pay a dividend through good times and bad deserves our respect.

No wonder investors love the S&P 500 Dividend Aristocrats, the stocks that have been paying growing dividends for at least 25 years.

But they can be expensive for dividend investors.

The other day I checked to see which Aristocrats are trading near their highs for the past year.

AT&T $T, Cincinnati Financial $CINF, Kimberly-Clark $KMB, and Pepsico $PEP…. they’re all riding high right now.

They all pay a dividend of more than 2.5%.

And they all have a history… Cincinnati Financial has been paying growing dividends since Eisenhower was in the White House.

Kimberly Clark has been paying dividends since Nixon was in the White House.

But here’s the thing.

The beauty of compounding turns low yield or modest yield into high yield.

Albert Einstein called compounding, “The most powerful force in the universe.”

This compounding gives you two ways to get the high yield you’re looking for.

First, you have the payments of the dividends piling up.  Reinvest those dividends, you have more shares of your stock, and that’s the first way you profit from compounding.

But don’t forget you actually have two compounding factors at work.

The second one is the growth of the dividend itself.

The dividend growth rate for S&P 500 stocks in 2014 was 12.64%.

Granted, 2014 was a very good year.  In 2001 and in 2010, we saw negative growth rates for dividend payments.  But over the long haul, you’ll get good growth… about 5%.  (Keep in mind that 5% is not adjusted for inflation.)

So when you pick up a dividend stock that’s paying a low yield, the yield on day one isn’t the yield you’re paid for as long as you own the stock.

With dividend growth and your reinvested dividends, it grows at a good clip.

And you also make money from the growth in your share price.

That’s why you actually wind up with a high yield when you don’t go looking for it.

The High Dividend Stock Nightmare

There’s a reason why companies like North Atlantic Drilling Limited pay unbelievable yields.

They’re in trouble.

Look at how the North Atlantic Drilling stock has been doing…

Dividend Stocks In Trouble $NADL Chart

Sure… an 86.5% yield is great.  As long as it’s paid.

And as long as the stock you bought to get that yield doesn’t lose 90% of its value in a year.

Cordially,

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 Yield

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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