There are currently 13,373 publicly-traded securities on U.S. exchanges. Of those, there are 2,100 stocks currently paying a dividend.
Now, any knucklehead with a computer can generate a list of the market's highest-yielding stocks in five minutes, but that's no way to find a good investment. Investing is not as simple as buying anything with a double-digit yield.
Ignore All Doubters. The Perfect Investment Does Exist
I've warned readers before about blindly buying these super-aggressive yielders. Nine times out of 10, a stock yielding more than 15% is likely in big trouble.
But today, I will reveal how I find reliable, healthy dividend-paying stocks and why they are essential to building long-term wealth.
Every security I recommend to my High-Yield Investing premium newsletter readers is put through a rigorous analytical boot camp before I even consider mentioning it. I must be sure that a high yield isn't a trap in disguise.
I start off with a large pool of growing companies yielding at least 5%. Then I run them through my "dividend optimizer" model to make sure they have all these key traits necessary for a steady and lasting income stream:
1. A long history of improving earnings. In general, the longer a firm has been profitable, the more likely it is to deliver steady returns in the coming years.
2. Consistent and growing dividend payments. I want to see steadily increasing dividends with no declines or missed payments.
3. Strong cash flows. Since you can't pay dividends without cash, I need to find companies that are generating above-average amounts of cash every year.
4. Strong projected growth. Growing firms are more likely to be able to boost their dividends in the future.
5. A sustainable payout ratio. Firms occasionally pay out 100% or more of their earnings to shareholders. They can't do this for long without cutting their dividend. I avoid unsustainable dividend payouts.
The dividend-payers that I recommend in my High-Yield Investing premium advisory offer the most compelling risk-reward trade-off you can find. These securities provide a smooth ride while producing market-beating returns, instead of heart-stopping peaks and plunges. Bottom line, they are far less volatile.
If you think about it, it's one of the few free lunches in investing: You can get better returns and lower risk just by purchasing dividend-paying stocks. So, if you want to keep your money out of long-term losers like T-bills or CDs and put it to work in tireless investments that will never stop making you money, then High-Yield Investing might be just for you.
You see, it's not the specific level of yield that matters to me -- although it's a great feeling to pocket 10% a year in cash. What really counts is that the companies are actually paying them. Dividends are a sign of financial strength; of a real business making real profits.
Dividends require executives to use capital efficiently. Such practices send a clear message that management is treating shareholders right by paying them the profits they deserve as co-owners of the business.
What's more, a steady stream of dividends indicates that a company keeps straight books. You can hide a lot of bad news with tricky accounting, but you can't fake dividends.
The only thing better than a generous dividend is a generous and growing dividend. And there's only one way to consistently raise dividends: by growing cash flow.
Any company that can do that year after year will create a near-miraculous pile of money for you. Here's what I mean...
Altria (NYSE: MO), which most investors dismiss as a stodgy company, is a perfect example of this phenomenon. There's nothing fancy about making wine and cigarettes. But with its high dividends and years of 15%-to-20% growth, Altria has thrown off some of the best long-term returns of any investment of the past two decades.
While $10,000 invested in the S&P 500 in mid-1988 has grown into a substantial $74,312, that same $10,000 put into Altria exploded into $1,493,921. You can attribute the bulk of that remarkable gain to Altria's decades-long record of high and rising dividends.
To be fair, the Altria story is a particularly strong example of the miracle of compounded dividends. Finding a company like this by picking one of the 2,100 dividend payers out of a hat would be near impossible. But this example is far from unique. With the criteria I outlined above, you can find hidden gems like Altria -- or the stocks I regularly feature in my High-Yield Investing portfolio -- with relative ease.
This article originally appeared on StreetAuthority.