5 companies that will keep paying dividends

By Harry Domash

Editor's note: To view the stock screen mentioned in this column, download the free MSN Money Investment Toolbox.

Just a couple of weeks ago, giant drug maker Pfizer (PFE, news, msgs) cut its quarterly dividend in half to help pay for its takeover of competitor Wyeth (WYE, news, msgs).
This is becoming a trend in 2009. The Associated Press reports that dividend cuts are coming at the fastest pace in 50 years.

So what about the idea that we should buy dividend-paying stocks so we can get paid to wait for the market to recover?

Actually, the strategy still makes sense -- with one proviso: You have to pick companies that won't cut their payouts. Doing that requires understanding why so many firms are cutting dividends. Here's my take.

Conserving cash is king

The corporate and commercial-real-estate credit markets are still very tough. Consequently, many corporations, no matter how profitable, expect to run into problems refinancing debt this year. For them, conserving cash is priority No. 1. Thus slashing cash payouts to shareholders is a no-brainer.

So, if you're going to follow the get-paid-to-wait strategy, you'd better pick companies that won't run into that problem. You can do that by sticking with stocks that don't owe anybody anything.

Here's a screen for finding such stocks. I'll start with the most important element: no debt.

No debt, no problem

The debt-to-equity ratio, which typically compares a company's long-term debt to shareholders equity (a company's total assets minus total liabilities), is a reliable financial strength gauge. However, to avoid looking too debt-heavy, some companies have figured out how to list long-term debt in the short-term column. MSN Money avoids that issue by including both short- and long-term debt in the calculation.

A zero ratio indicates no debt; the higher the ratio, the higher the debt. But because long-term lease obligations count as debt, you don't need to require an absolute zero. I bumped my maximum allowable ratio to 0.05 to allow for companies carrying no real debt except for lease obligations.

Screening parameter: Debt to Equity Ratio <= 0.05

Now that we've isolated no-debt companies, we'll pinpoint the significant dividend payers in the group.

Dividend yield

Dividend yield is similar to interest from a bank certificate of deposit or money market account. It's the return you'd receive on your initial investment from dividends over the next 12 months, assuming that the dividend didn't change.

The yield that you see listed on MSN Money and most other financial sites assumes that the last declared dividend will continue to be paid over the next 12 months. They calculate the yield by dividing the next 12 months' expected payouts by the recent share price.

For example, the yield would be 10% for a stock trading at $10 that's expected to pay dividends totaling $1 over the next year. If you bought the stock, your yield would be based on the price you actually paid for the shares. For example, if you ended up paying $11 per share for the stock, your yield would drop to 9.1% ($1 divided by $11).

If the company cut its payout during the year, your yield would drop accordingly.

I required a minimum 3.75% yield, more than you could get with most bank accounts these days. Since I arbitrarily picked that figure, try lowering it if you want to see more stocks or raising it if you want higher yields.

Screening parameter: Current Dividend Yield >= 3.75

The way the math works, yields go up when share prices drop. Thus many stocks that have been smashed in this bear market appear to be paying 20% or even higher yields. Alas, these are usually "too good to be true" situations. Those high yields often tell you that a dividend cut is in the cards.

Whether those warnings are correct or not, once you get much above the usual range, say 10% or so, the higher the expected yield, the higher the risk. That makes it wise to specify a maximum yield. Because so many good stocks have been crushed in this market, I allowed a little extra leeway and set my maximum yield at 15%. Cut your limit to 10% if you want to reduce your risk.

Screening parameter: Current Dividend Yield <= 15

Since minimizing risk should be the priority in this market, here are four more screening parameters intended to help achieve that goal.

Continued: Avoid the smallest companies

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