Read This Before You Buy A High-Yield Dividend Stock

Nathan Slaughter's picture

Wednesday, July 3, 2019 - 12:00am

by Nathan Slaughter

There are about 13,400 publicly-traded securities on U.S. exchanges. Of those, only about 2,100 of those stocks pay a dividend.

Now, any knucklehead with a computer can generate a list of the market's highest-yielding stocks in five minutes, but that's no way to find a good investment. Investing is not as simple as buying anything with a double-digit yield.

I've warned my High-Yield Investing premium readers about blindly buying these super-aggressive yielders. Nine times out of 10, a stock yielding more than 15% is likely in big trouble.

But today, I want to show you how I find reliable, healthy dividend-paying stocks -- and I'll explain why they are essential to building long-term wealth.

My 5-Part "Dividend Optimizer" Model
Every security I recommend to High-Yield Investing readers is put through a rigorous analytical boot camp before I even consider mentioning it. I must be sure that a high yield isn't a trap in disguise.

I start off with a large pool of growing companies yielding at least 5%. Then I run them through my "dividend optimizer" model to make sure they have all these key traits necessary for a steady and lasting income stream:

1. A long history of improving earnings. In general, the longer a firm has been profitable, the more likely it is to deliver steady returns in the coming years.

2. Consistent and growing dividend payments. I want to see steadily increasing dividends with no declines or missed payments.

3. Strong cash flows. Since you can't pay dividends without cash, I need to find companies that are generating above-average amounts of cash every year.

4. Strong projected growth. Growing firms are more likely to be able to boost their dividends in the future.

5. A sustainable payout ratio. Firms occasionally pay out 100% or more of their earnings to shareholders. They can't do this for long without cutting their dividend. I avoid unsustainable dividend payouts.

The dividend-payers that I recommend in my High-Yield Investing premium advisory offer the most compelling risk-reward trade-off you can find. These securities provide a smooth ride while producing market-beating returns, instead of heart-stopping peaks and plunges. Bottom line, they are far less volatile.

The Only Thing Better Than A Generous Dividend
You see, it's not the specific level of yield that matters to me -- although it's a great feeling to pocket 10% a year in cash. What really counts is that the companies are actually paying them. Dividends are a sign of financial strength; of a real business making real profits.

Dividends require executives to use capital efficiently. Such practices send a clear message that management is treating shareholders right by paying them the profits they deserve as co-owners of the business.

What's more, a steady stream of dividends indicates that a company keeps straight books. You can hide a lot of bad news with tricky accounting, but you can't fake dividends.

The only thing better than a generous dividend is a generous and growing dividend. And there's only one way to consistently raise dividends: by growing cash flow.

Any company that can do that year after year will create a near-miraculous pile of money for you. Here's what I mean...

Altria (NYSE: MO), which most investors dismiss as a stodgy company, is a perfect example of this phenomenon. There's nothing fancy about making wine and cigarettes. But with its high dividends and years of 15%-to-20% growth, Altria has thrown off some of the best long-term returns of any investment of the past two decades.

While $10,000 invested in the S&P 500 in 1997 grew into a substantial $45,500 by 2017, that same $10,000 put into Altria exploded into $223,284. You can attribute the bulk of that remarkable gain to Altria's decades-long record of high and rising dividends.

To be fair, the Altria story is a particularly strong example of the miracle of compounded dividends. Finding a company like this by picking one of the 2,000-plus dividend payers out of a hat would be near impossible. But this example is far from unique. With the criteria I outlined above, you can find hidden gems like Altria -- or the stocks I regularly feature in my newsletter  -- with relative ease.

Action To Take
If you think about it, it's one of the few free lunches in investing: You can get better returns and lower risk just by purchasing dividend-paying stocks. So, if you want to keep your money out of long-term losers like T-bills or CDs and put it to work in tireless investments that will never stop making you money, then High-Yield Investing might be just for you.

If you agree, then I urge you to check out my latest research report, which goes into more depth about how to put high-yield stocks to work for you today.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.