How to Find Stocks That Pay

I’ve never met a man gone broke with regular checks coming in.

And sure, just like in this market you can still lose a lot in sinking stock prices. But if you can continue to buy and own a collection of stocks and bonds that have the ability to keep the checks coming for the years to come you’ll make it through pretty much whatever Wall Street might stick you with along the way.

For years I’ve been focusing on my mantra of buying and owning stocks that pay. In a market that’s overflowing with Wall Street pitchmen and CEOs interested in feathering their nests while stripping away yours – investing in dividend paying stocks and bonds has always been the solution.

This isn’t the way of Wall Street. As instead – it has been built by pushing IOUs that promise growth rather than paying you a cut of ongoing profits. “Trust us,” they say.

But as the rest of the world is learning – why should we keep buying snake oil?

A Better Way to Invest

Now, we know first hand that Wall Street can dump on just about everything. Whether it’s a cash generating machine or a scam, it can be battered.

But this doesn’t mean that you need to flee – only to understand the power of stocks that pay.

Dividends build up your portfolio’s value. Wall Street might take swipes at it – and it can knock it down – but it can’t stop the growing pile of cash from the right collection of stocks and bonds.

And that power of stocks that pay only gets stronger over the years. For as the years progress – the compounding of dividends starts to add up. And two things matter with dividends – the longer you get them and how much you’re getting along the way.

It’s compelling to try to grab the highest dividends – but as I’ve written over the past year – often it’s not the highest yielders that generate the best longer-term returns – but the more reliable if not more modest payers.

This is why over the past year I’ve recommended selling several higher dividend paying stocks and bonds – favoring those that pay a bit less now – but continue to be more likely to continue to keep paying.

So my bottom line continues to be that getting paid consistently adds up to covering a lot of near term market losses. And over the years – it makes it more likely that you’ll be worth more if you buy stocks that pay than if you rely on Wall Street’s pitch to bet on growth.

Four Rules for Finding Worry-Free Stocks That Pay You

Dividends work – but only if the stocks paying them keep paying. Nothing in this market or any market should be taken at face value. This is why I have four rules of vetting my recommendations.

Rule 1: Buy Stocks that Pay

First of course is that the stock has to pay us. It doesn’t have to be the highest dividend – but getting your cut of the ongoing profits makes it not only more likely that you’ll profit over the years – but it also helps to prove the validity of the company that has to cut the checks.

Sure, there are some exceptions to the stocks that pay rule. But in these rare cases – the companies have to sorely justify the reinvestment of profits with compelling regular performance and not just a promise that someday all will be profitable.

Rule 2: Choose Only Sustainable Businesses

Second, the business behind the stock has to be sustainable. Cash can’t come from a company that’s bleeding capital. So, I’ve always looked not at the best business environment – but the worst when looking at survivability.

A case in point can be seen with one of my previous recommendations – WD-40 (NSDQ: WDFC). While history doesn’t prove future prospects – it can demonstrate how companies deal with adversity.

In the last recession, the company continued to bolster revenues – and both gross profit and operating income continued to be hefty with margins still in the upper double-digit percentages. And the increases in the stock’s price reflected the underlying health of the company!

Rule 3: Stress-Test the Company’s Financial Structure and Plans

Third, the company behind the stock has to be financially sustainable. As we’ve seen before – a good business can be run into the ground if it can’t keep funding its current operations as well as funding expansion.

This is where I look at the balance sheet and the income statements and run my what ifs. Part one is to look at the current debt and the maturities and rollovers of that debt. This means that I can see when the company has to deal with creditors to keep funding going.

Part two, I need to see that the assets of the company provide enough backing for lenders’ comfort and that cash on hand as well as cash coming in can sustain debt coverage.

A case in point is another recommendation – Linn Energy (NSDQ: LINE). The petrol producer has a small bond maturing in 2018 and a revolving credit line. From a balance sheet basis – its debt is less than 48 percent of assets – making it under leveraged and more creditworthy.

And from a cash standpoint – even at lower petrol prices, its revenues can still continue to remain steady to rising at expansion rates in the double-digits (currently running at an annual rate of 20 percent).

Rule 4: Determine in Advance When to Get Out

Fourth – I assess market risk for the stock. The adage that the market can be wrong about a stock a lot longer than we can be solvent is ever more important now.

You might ask – if the company is business and financially sustainable, should we be as concerned over the market’s price of the stock if we are prepared to ride out the market’s woes?

The challenge here is that if the market does send the price low enough, the company’s market capital could be reduced to a point where it would be harder to keep up its financial stability.

My response continues, as always, to watch the market’s pricing ever carefully and monitor the equity capital. If it continues to fall to levels that begin to threaten the financial stability – then I have to sell.

I perform this four-step analysis every time I consider buying a security. By becoming a regular reader of Stocks That Pay You, you’ll be able to avoid the many popular favorites that are actually terrible places for your money — and spot the solid, high-dividend payers that are found well off the beaten track.