Dividends are the stock market’s great safety net. No matter what turbulence the market may bring, cash in your pocket will always be in-style. The trick to getting dividend investing right is to pick companies that have strong yields and good prospects, so they can increase the dividend. Look for stocks with these two characteristics:
1. A low pay-out ratio. This is the percentage of cash a company pays to its shareholders (via dividends) from their earnings. Stocks with pay-out ratios below 50% and strong yields outperform the market, because the dividends are sustainable.
2. Current earnings growth and long-term growth catalysts. Simply put, more money coming in means more money paid out to you.
Today’s dividend winners
It goes without saying that with markets at record highs (and possibly overvalued), and a new European crisis at our doors, dividend-paying stocks are a good idea now. Here are some dividend winners that meet the aforementioned criteria.
General Mills, Inc. (NYSE:GIS)
General Mills, Inc. (NYSE:GIS) has household food brands that we all love, such as Cheerios, Pillsbury, and Yoplait. The company is more than just a collection of brands, however–it’s a dividend powerhouse. Over the past five years General Mills, Inc. (NYSE:GIS) has managed to grow earnings (9%) and their dividend (11%) at a strong, average, annual clip. The nice part is that the company only raises the dividend once it raises additional cash, and to date they still sport a pay-out ratio below 50%, despite offering a healthy 2.74% yield.
What’s truly unique is how much General Mills (NYSE:GIS)‘s brands have a direct effect on pricing power. The company enjoys a ridiculously high gross profit margin of 37.23%. That’s just not seen in the consumer staples industry typically and it offers a wide moat against competition. With food prices in danger of rising alongside inflation, General Mill’s pricing power is a true catalyst that should help to protect its dividend and steal market share when industry headwinds hit.
Potash Corp./Saskatchewan (USA) (NYSE:POT)
This fertilizer and feed producer is cyclical in nature, and has seen its industry in the midst of a lull. It sports a pay-out ratio below 50% and a dividend yield around 2.8%. The bullish dividend trend is that customers can only put off buying Potash Corp./Saskatchewan (USA) (NYSE:POT) products for so long. Sooner or later they need to replenish their inventories. Long-term catalysts include: inflationary effects on food prices, severe weather trends, and a global population that’s on its way to 9 billion (from 7)!