Finding the Right Dividend Stocks

09/23/2008 12:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Jim Jubak, senior markets editor for MSN Money, finds three new stocks for his “unfixed-income” portfolio.

Dividend stocks haven't been safe in this market for two reasons. First, a bear market—and that's still where we are with the long-term trend still pointing down—acts as a kind of massive margin call on investors.

If you have to raise cash in a bear market, you don't sell only your losers. They've already dropped so much in price that selling won't produce all the cash you need. Instead, sellers sell everything.

The second reason for the plunge in the price of dividend stocks applies to only some high-yield stocks. The growth strategies at some high-yield companies were themselves built on leverage. When it got hard to borrow more money to buy more assets, many of them had to start deleveraging themselves.

The financial crisis and the inability to raise capital hit just about every dividend-paying company built on this structure to one degree or another, with the severity of the damage depending on how much leverage was used.

Right now, if I were trying to maximize the cash flow that a retirement portfolio would pay me ten or more years down the road, I’d do my best to put some of my fears about the current financial markets behind me and buy some of the best of the beaten-up high-yield stocks.

With ten years or so to go until I'll need this income, I'd like to put the power of compounding on my side to increase my future cash flow from today's investment by as much as possible.

This strategy starts with common stocks that pay high dividends. My goal is to find equity investments with yields above the percentage paid by five-year Treasury notes (2.94% on Sept. 12) or, even better, above the yield on ten-year Treasury notes (3.82% on Monday). And these common stocks should be as safe as or safer than the five- or ten-year Treasuries under current market conditions.

Then I add a third criterion: these common stocks should have superior histories of raising dividends year in and year out. It's this last element that gives income investors a fighting chance to beat today's low yields and stay ahead of inflation. How does it work? By putting the power of dividend compounding to work for long-term income investors.

[So,] I'm adding Rayonier (NYSE: RYN), with its 4.45% yield and its record of growing dividends by 29% a year over the past five years; Exelon (NYSE: EXC), with its 3% yield and its record of growing dividends by 14.9% a year over the past five years; and Oneok Partners (NYSE: OKS), with its 7.5% dividend yield and its record of growing dividends by 4% a year over the past five years. These three stocks [are now members of my] unfixed-income portfolio.

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