Make your money work for you with high-quality dividend-paying stocks


“You work hard for your money. It should work hard for you.”

I’ll bet a hundred financial institutions have used some version of that slogan. And with good reason: I believe the slogan is true.

One easy way to make income investing work for you

That’s why I’m a passionate believer in income investing, a strategy that makes every dollar work its tail off to help grow your nest egg.

An income investing portfolio is a basket of assets that generate cash in the form of stock dividends, bond interest, and payouts from alternative investments like real estate investments trusts (REITs) and energy pipeline companies. During your working years, this money is reinvested back into the portfolio to speed the growth of your retirement account.

When you are ready to call it a career, that income can be redirected to help fund your new retirement life.

I have some good news if you are looking to build or expand an income portfolio: With the market’s inevitable turbulence, one of my preferred areas to invest in when in good times and bad are high-quality dividend-paying stocks.

The stocks I typically look for generate yields that are nearly double the overall market and about 30% to 100% more than you’d earn from 10-Year Treasury Bonds. As a bonus, many of these shares are issued by companies with very low debt or even “negative debt,” which means the company has more cash in the bank than debt on its books.

Such equities could provide you with a degree of insulation from the market turbulence that would be caused by a credit crash that might result if publicly-traded companies that gorged on low-interest loans were suddenly unable to meet their debt or refinance it.

Curiously, as of early 2019, many low-quality dividend stocks are not trading at a discount compared to the rest of the market. As a result, many high-quality dividend stocks I’ve described have become comparatively cheap. The S&P 500 today trades at about 15.5x earnings and pays a dividend yield of about 1.9%. (For context, 14x earnings is considered cheap, 20x is high.) In this kind of environment, I look for stocks trading below 15.5x and that have yields higher than 3.0%.

While I can’t give specific stock examples since markets can change on a dime, here is a group of companies identified by their specific sector that exhibit what I’ve described above (as of January 1, 2019). One is an investment bank, another is a dividend-paying tech and telecom equipment giant, and last is one of the largest engine and power systems companies in the world. (Please also remember that I do not know if these investments make sense for your particular situation. Investing is different for each investor.)


Consider the figures for these companies:

Stock Category YIELD Forward P/E
Investment Bank 3.23% 13.6
Telco Equipment 3.08% 13.2
Engine Manufacturing 3.44% 19.4
Average 3.25% 15.4
S&P 500 1.90% 15.5

These companies have virtually zero net debt. Their average dividend payout is 42% higher than the rest of the market.

While the market is not currently showing much love to these ultra-high-quality balance sheet companies, I suspect that will change. At some point, investors may pay up for the potentially significant income and protection offered by these stocks.

Below are some items to consider when choosing high-quality dividend-paying stocks for your

1. Begin with the S&P 500 universe and screen for companies with a market cap value of$5 billion or more.

2. Eliminate companies that aren’t growing their dividend by at least 4% per year.

3. Trim the list by looking at companies with reasonable Forward P/E multiples — 20x or less.

Consider running through this process yourself to find a list of companies that are both attractively priced and offer steadily growing dividends. They may not be as sexy or fast- growing as some of the companies financial news headlines love to talk about, but, in my opinion, these high-quality stocks – should not be ignored.

Disclosure: This information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

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