How to Find Solid Dividend-Paying Stocks

Businesses that have competitive advantages within their industry are good candidates for dividend-seekers

Josh Peters, CFA 22 August, 2012 | 10:47AM

I’ve never thought of my dividend-focused investment strategy as being primarily rules-based. In changing times—and the times are always a-changin’—it helps to have a flexible view of the world. For example, when buying a stock, I always require the prospect of acceptable dividend growth going forward. But that, of course, is a matter of prediction. While a history of dividend increases can make me more confident in future growth, I see no point in requiring 10 or 20 years of uninterrupted dividend increases before buying. In fact, some of my favourite investments right now (such as Compass Minerals (CMP) and Philip Morris International (PM) have not even been public long enough to build a long-term record.

Still, at the heart of my strategy, there are two very important rules. The first, naturally, is that any stock I buy must pay a dividend. I want the income—to meet my personal financial objectives and drive total returns. I also want the discipline that a meaningful dividend imposes on the companies in which I’ve invested. Historically, dividend-payers have outperformed non-payers, and high-yielding stocks have outperformed low-yielding ones.

The second rule is this: I won’t buy a stock—no matter how alluring its dividend might be—unless I can conclude that the business that pays it is protected by an economic moat (also known as a sustainable competitive advantage). This “moat” rule is a little less intuitive than the first rule, but it gets right at the heart of what separates a good business from a bad business, a reliable dividend from a risky one, and an attractive total return from a poor one.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Compass Minerals International, Inc.48.04 USD-2.44
eBay Inc58.27 USD2.23
Facebook Inc Class A243.58 USD1.13
General Mills, Inc.62.94 USD-0.06
Johnson & Johnson143.27 USD0.29
Philip Morris International, Inc. EUR  

About Author

Josh Peters, CFA  is the editor of Morningstar DividendInvestor, a monthly newsletter available in the US, and is author of The Ultimate Dividend Playbook.

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