Best Dividend Stocks

The Warren Buffett assumption

Warren Buffett has been quoted as preferring that companies he holds avoid paying dividends. Historically, capital gains have been taxed at lower rates than dividend income. In addition, a growing company may be able to earn more on its capital than its shareholders. However, this approach assumes honest financial statements, and that cash piled up will not be squandered on ill-advised acquisitions for empire building. For an example consider when Time Warner bought AOL. This happened while many people of the slightest technical sophistication were learning that internet access did not need the AOL training wheels.

Avoiding a Madoff situation

As many bad episodes have illustrated, a number called net income written on a paper may be false. It may be an outright lie, as was set out by Madoff. However, dividends cannot be lies, because cash is required to pay out the dividends declared.

Basic balance sheet and income statement numbers

Important ratios will be commented on. Also to be provided, a checklist to help ensure you are buying the best dividend stocks.

Too good to be true
A very high yield does not mean that the stock is good value, it usually means that the dividend will be cut or eliminated.

Future editing of this page will include a chart comparing the return from dividend paying stocks, to an index. The hypothesis is that the dividend paying stocks are more stable. In the meantime consider this checklist for investing in dividend stocks.

• Long term history of paying dividends
• Steady increase in dividends
• Reasonable ratio of free cash flow to dividend coverage
• Dividend ratio within normal limits (too high implies a market belief that a decline is imminent)
• No big decline on the horizon

A recent book How the Mighty Fall by Jim Collins points out some warning signs that a good company is in decline. Recommended reading for its long term perspective.