The most important lesson to learn about dividends is never ever buy a stock simply because it pays a good dividend. Buy the shares because they are in a good company that makes a lot of money and happens to pay a good dividend.
Dividends are the icing on the cake, not the desert itself. There are plenty of horrendous companies out there that pay great dividends. A classic example is Rent-A-Center (NASDAQ: RCII), which paid a dividend yield of 7.96% on Dec. 31, 2015. On the same day, Rent-A-Center also reported a return on equity of -71.19%, a profit margin of -115%, and a net income of -$866.63.
Lousy companies like Rent-A-Center and almost any mortgage real estate investment trust (or MREIT) pay high dividends because it is the only way management can attract investors. Basically, they are paying you to take away their garbage stock. Always be skeptical of a company paying really high dividends; a good rule of thumb is if the dividend is high, something is very wrong somewhere.
Fortunately, there are lots of really good companies out there that pay nice dividends without giving undue risk. Finding these entities is not as hard as you might think. To show you the way, I have compiled a list of such stocks. These companies pay impressive dividends, but more importantly, they make a lot of money and have a lot of cash.
Ten Great Dividend Stocks
- Apple (NASDAQ: AAPL) – Any company that reported a TTM revenue of $234.99 billion, a net income of $53.73 billion, a profit margin of 24.2%, a free cash flow of $23.46 billion, $75.10 billion in cash from operations, and $38.07 billion in cash and short-term investments for the fourth quarter of 2015 is worth owning. A company that reported those numbers, a dividend yield of 2.02%, and a return on equity of 42.94% belongs in your portfolio. Apple is great because it is both a dividend stock and a growth stock.
- Viacom (NASDAQ: VIA) – This entertainment combine has suffered some revenue losses lately, but it is still paying out a 3.52% dividend yield. More importantly, Viacom is cheap and undervalued right now; it was trading at $43.50 a share on March 4, 2016. Viacom has some impressive assets, such as Paramount’s film library and the Star Trek movie franchise. It is also undervalued, with a $17.22 billion market capitalization and a $29.52 enterprise value on March 4, 2016.
- JPMorgan Chase (NYSE: JPM) – The banking colossus rewarded shareholders with a 2.86% dividend yield despite serious revenue losses in recent years. Chase is a great investment because it is flushed with cash. It reported $93.54 billion in revenues, a net income of $24.44 billion, a free cash flow of $16.17 billion, $360.5 billion in cash and short-term investments, and $73.47 billion cash from operations on Dec. 31, 2015. Chase is also fairly cheap right now – it was trading at $60.05 a share on March 4, 2015.
- Kroger – (NYSE: KR) – The grocery giant is the best bargain in retail right now. It was trading at $36.84 a share on March 4, 2016 because of a recent stock split, yet Kroger is company that reported $108.87 billion in revenues on Oct. 31, 2015. It is also an undervalued company, with a market capitalization of $35.91 billion and an enterprise value of $46.97 billion on March 4, 2016 that has some great growth prospects. The dividend yield is low at 1.11%, but it will probably go up. One great advantage to Kroger is that you can buy a lot of shares fairly cheaply right now. Kroger is also a discounter that specializes in selling consumer basics, so it will be a great stock to ride out in an economic downturn.
- Walmart Stores (NYSE: WMT) – The reason to pick Walmart is a very simple one: it is a good company that is undervalued and underappreciated by the market, but pays a good dividend. The world’s largest retailer paid a dividend yield of 2.94%. It also had some impressive financial numbers, including a TTM revenue of $482.13 billion, a net income of $14.69 billion, a free cash flow of $9.13 billion, $27.39 billion in cash from operations and, $8.705 billion in cash and short-term investments. Walmart is also undervalued right now, it had a market cap of $213.82 billion and an enterprise value of $251.85 billion on March 4, 2016. Something else that investors tend to forget about Walmart is that it rewarded investors with a return on equity of 18.51% on Jan. 31, 2016, despite all its well-publicized troubles.
- Cisco Systems (NASDAQ: CSCO) – What’s not to love about this tech giant? It’s flush with cash, it’s cheap, and it pays a nice dividend. Cisco paid a dividend yield of 3.13%, even though it was rolling in the dough. The systems maker reported $60.38 billion in the bank, $49.59 billion in revenue, $13.87 billion in cash from operations, a net income of $10.33 billion, and a free cash flow of $3.608 billion for the fourth quarter of 2015, yet it was trading at $26.8 a share on March 4, 2016. Definitely a bargain, particularly because of growing revenues.
- Microsoft (NASDAQ: MSFT) – Yet another underappreciated tech giant that paid a dividend of 2.58%, Microsoft is still making a lot of money despite falling revenues. The software giant reported a net income of $11.41 billion, revenues of $88.08 billion, a profit margin of 21%, a free cash flow of $3.547 billion, $30.58 billion in cash from operations, and $102.64 billion in cash and short-term investments for the fourth quarter of 2015. Value investors that like cash but want a dividend would be well served by Microsoft.
- US Bancorp (NYSE: USB) – This underappreciated bank is a real bargain. It rewarded investors with a dividend yield of 2.46%, yet was fairly cheap at $41.03 a share on March 4, 2016. Other attractions at U.S. Bank include growing revenues and impressive financial numbers. U.S. Bank reported $20.09 billion in revenue, a net income of $5.89 billion, a profit margin of 28.61%, a free cash flow of $2.531 billion, $8.782 billion cash from operations, and $11.15 billion in cash and short-term investments for the fourth quarter of 2015. It was also one of the most undervalued companies around, with an enterprise value of $126.28 billion and a market capitalization of $71.28 billion on March 4, 2016, so there’s plenty of room for growth.
- ExxonMobil (NYSE: XOM) – The world’s largest oil company is worth buying simply for the dividend yield of 3.55%. Yet is also worth owning for the cash; in spite all of its troubles, Exxon reported a net income of $16.15 billion, a profit margin of 4.65%, $30.34 billion cash from operations, and $3.705 billion in cash and short-term investments. Exxon is the riskiest company on this list because of the recent oil price collapse, but it still makes a lot of money. No matter what happens, I predict this oil giant will make money and pay a decent dividend for years to come.
- Ford Motor Co. (NYSE: F) – Those who are looking for a speculative dividend play need to check out Ford because it just so cheap right now. The stock was trading at $13.59 a share on March 4, 2016, yet it was paying a dividend yield of 4.42%. The automaker also posted some very good financial numbers on Dec. 31, 2015, including a growing TTM revenue of $149.56 billion, a net income of $7.373 billion, a profit margin of 6.6%, $14.32 billion in cash from financing, which signifies a lot of float, $16.17 billion in cash from operations, and $62.72 billion in cash and short-term investments. Ford is also an incredibly undervalued company – it had a market cap of $53.96 billion and an enterprise value of $124.56 billion on March 4, 2016.
These companies were picked because they combine cash, growth potential, a degree of stability, and a dividend. Some of them are also very cheap to the point of being undervalued. The list is a little heavy on tech and banks because that is where the money is these days. As you can see, you do not have to sacrifice growth or cash for dividends.
Disclosure: Your friendly neighborhood blogger owns a few shares of Kroger.