How Healthy Dividend-Paying Stocks Can Boost Your Portfolio’s Returns

Need more money? You're certainly not alone. Investors of all levels are scratching around trying to find decent income to supplement their other investments - especially now that food and other costs are starting to spike. Trouble is, with interest rates still so low, bonds, CDs and money market funds just aren't getting the job done for many people. As a result, investors are chasing yield-bearing stocks in order to generate the income they want. That's fine… as long as you remember that it's not just the amount of income generated that's important, but also the reliability. And if you're using the income to pay the bills, the stability of the dividend becomes even more critical. For example, let's assume an investor figures he'll need $40,000 per year in dividend income to pay his mortgage and food costs. But what happens if two of the companies in his carefully structured $40,000 dividend portfolio suddenly cut their dividends and he now only earns $34,000 from it? That $6,000 shortfall means he needs to dip into his capital to make up the difference. As a result, his income in the following years will be lower, as he's starting with a smaller investment base. For that reason, it's important for income investors to have a firm grasp on one key number… The Payout Ratio: The Key to Finding Healthy Dividends It's called the payout ratio. Simply put, it measures the percentage of a company's net income that is paid out as dividends. So, if a company earns $100 million and pays out $50 million in dividends, its payout ratio is 50%. Generally speaking, you want to see a payout ratio of less than 80%. This allows enough of a buffer zone for a company so that if its net income falls, it won't have to cut the dividend. So using the above example, if our $100-million net income company has a bad year and only earns $75 million the following year, it should still be able to maintain the $50 million dividend without a problem. So how do you separate the dividend-paying contenders from the pretenders? Scouring the Market for Healthy Income Stocks While scouring for potentially healthy dividend-paying stocks recently, CPFL Energia (NYSE: CPL) popped up on my radar.... Read more