The power of dividend investing is pretty well known these days. Higher-yielding stocks tend to offer higher returns over time than low- or no-yield stocks, according to research from Jeremy Siegel and others. In fact, the 20 best-performing survivor stocks from the original S&P 500 in 1957 are all dividend payers.
What's more, reinvesting dividends acts as a "bear-market protector and return accelerator," according to Siegel. The extra shares purchased and accumulated at higher dividend yields during down periods act as a protector in falling markets, and these extra shares rising in value turn into a "return accelerator" when prices rise.
As the recent economic crisis illustrated all too well, however, you can't buy just any high-yielding stock. Dividends that get cut or suspended entirely can wreak havoc on a stock price -- and thus, your portfolio. And since today we're dealing with relatively low-yielding/high-volatility tech stocks, we have to be on our toes.
Combine high yield with low risk
Fortunately, there are steps you can take to lessen your chances of buying one of these train wrecks. James Early, advisor of our Motley Fool Income Investor service, suggests looking at the payout ratio, for starters. That's simply the percentage of a company's net income used to pay its dividend. Obviously, the higher the payout ratio, the tougher it is for a company to meet its dividend obligation. James looks for a payout ratio less than 80% for safer companies, and a sub-60% or even sub-50% payout for companies you consider risky.
To further stack the odds on your side, you can limit your search to companies that have grown their dividend over the past three years or so. That eliminates the less stable or erratic dividend payers.
I constructed a screen to find some promising high-yield, low-risk tech stocks for further research. I made sure the stocks met the following criteria:
Here are the top 10 highest yielders the screen produced.
Maxim Integrated Products
Molex (NAS: MOLX)
Broadridge Financial Solutions (NYS: BR)
Applied Materials (NAS: AMAT)
Harris (NYS: HRS)
Microsoft (NAS: MSFT)
Xerox (NYS: XRX)
Texas Instruments (NYS: TXN)
Source: Capital IQ, a division of Standard & Poor's.
These stocks are great places to start your research, but they're not formal recommendations.
What this means
Siegel sums it up nicely in his book The Future for Investors: "Bear markets are not only painful episodes that investors must endure, but also an integral reason why investors who reinvest dividends experience sharply higher returns."
Whether in bear or bull markets, there's a reason why the top-performing stocks over the decades are all dividend payers. If you're lacking that type of exposure in your portfolio, you should take the first steps now toward finding stable dividend payers designed to weather any market cycle.
At the time thisarticle was published Fool analystRex Moorelikes dividend-paying tech stocks and owns shares of Microsoft. You cankeep up with him on Twitter. The Motley Fool owns shares of Applied Materials, Texas Instruments, Broadridge Financial Solutions, and Microsoft and has written puts on Broadridge Financial Solutions.Motley Fool newsletter serviceshave recommended buying shares of Western Union and Microsoft, creating a write covered strangle position in Western Union, and creating a covered collar position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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