How to Find the Best Dividend Stocks

09/12/2011 4:02 pm EST

Focus: STOCKS

Fred Fuld

Publisher and Founder, Stockerblog.com and WallStreetNewsNetwork.com

We’re all hearing about dividend payers being the best bet right now, but how do you filter out the right ones? Fred Fuld of Stockerblog.com shares his method and one of his favorite picks, in this exclusive interview with MoneyShow.com.

Let’s talk about dividend investing. It seems like it’s a good way to find income in an incredibly volatile market.

That’s right. Especially when markets, you know, have severe upside, severe downside. We have had crashes recently.

It’s really the way to go, because no one can tell you what the market’s going to do a week from now or a month from now or six months from now. If they do, they’re either a liar or a thief.

If you do own dividend stocks, you can gradually invest in them. You don’t have to put all your money into dividend stocks at once, but if you gradually invest, then if the market drops down you’re still going to get income. If the market stays the same, you’re still going to get income. If the market goes up, you’re still going to get income plus capital gains. It’s almost like a win, win, win situation.

I can’t tell you what the market is going to do short-term, but I can tell you what the market is going to do long-term. It’s going to go up long-term. Over the long term, if you have income coming in, your capital will be returned to you faster, and you’ll have that money to spend while you’re waiting for the market to recover if, for example, the market does drop in the meantime.

Well, Fred, how do you drill down? I can look at a sheet and see wonderful dividend yields, but it’s not necessarily telling me if the company is strong. It could be just telling me that the price of the stock is falling like a stone.

That’s right.

Tell me what I should be looking for.

Well, one of the things that I look for is dividend coverage. In other words, how much operating income they receive versus how much they send out in dividends to their shareholders. As long as that margin is not decreasing on a regular basis or it’s not right at the edge, you’re at pretty good shape.

In other words, if they have operating income, say, of $500 million, and they’re paying out dividends of $250 million, then they have excellent coverage—but if it’s $255 million that’s coming in operating income and they’re paying out $200 million, it’s getting closer and closer.

That’s something to watch out for, unless it’s a real estate investment trust or something like that that’s required to pay out virtually all its income.

Right, right. Any other things that I should be looking for? Management? History of dividend payouts?

Yes, definitely history of dividend payouts is a good thing to look at.

There are companies like Kinder Morgan (KMP). As an example, they’ve been paying dividends for many years. They’re in the business of transporting petroleum, and not really owning the petroleum they don’t really have that market risk of whether the price of oil goes up and down. But they just transport the petroleum, and the stock yields in excess of 10%.

They’ve been paying dividends for many years. They’ve increased their dividends every year. They’re a master limited partnership, which does have some tax issues, especially if you invest through a retirement plan—that, you have to talk to your accountant about—but an example like that is a perfect example of long-term history and track record.

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