An article “How Yield on Cost Works” by David Van Knapp discussed the basic yet oft-misunderstood concept of yield on cost (YOC). In a nutshell, it explains why your personal yield from a dividend stock goes up as the company increases its dividends. The reason is because your personal yield is based—and always will be based—on the price you paid for the stock. That’s what the “C” in YOC stands for: Your cost. It is not affected by changes in the price of the stock after you bought it. If you make additional purchases, each new purchase has its own YOC.
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Dividend yields will often fall in low interest rate environments (usually due to a slow economy) and bull markets (stock returns tend to outpace dividends.) When you combine those two factors over the last 18 months the average dividend yield available in the S&P 500 has only been lower during the stock bubble of 2000-2001. This is not a great sign for stocks over the long term but it does mean that there are a few firms who are really standing out in contrast. We should expect to see dividend yields remain low while the Fed keeps interest rates near zero.

We have listed the criteria we used to develop the search for these stocks below. You can also run the search yourself at finviz.com. Try to modify the criteria yourself to meet your specific investing style.

Here are the criteria and the stocks returned by the screener:

• Dividend Yield
• Optionable and Shortable
• ROE
• Performance

Omega Healthcare Investors (OHI: 23.15, 0.29)
Dividend Yield: 6.47%
ROE: 8.46%
Performance (YTD): 23.30%
Dividend Growth Rate 5yr Avg: 9.73%
Dividend Payout Ratio: 162.00%
Consecutive Div. Increases: 6 years
Dividends paid since: 1992

Consolidated Communications Holdings (CNSL: 18.77, 0.06)
Dividend Yield: 8.28%
ROE: 42.19%
Performance (YTD): 16.43%
Dividend Growth Rate 5yr Avg: 55.79%
Dividend Payout Ratio: 161.00%
Consecutive Div. Increases: 0 years
Dividends paid since: 2005

Alliance Holdings GP (AHGP: 44.24, -0.12)
Dividend Yield: 4.36%
ROE: 49.02%
Performance (YTD): 69.12%
Dividend Growth Rate 3yr Avg: 23.78%
Dividend Payout Ratio: 83.00%
Consecutive Div. Increases: 3 years
Dividends paid since: 2006
This stock looks like a good candidate for further review. It has a decent payout ratio (considering the sector in which the stock belongs to), good dividend yield and promising dividend growth (the stock hasn’t paid/increased the dividend long enough to review 5yr growth).

Tanger Factory Outlet Centers (SKT: 44.24, 0.09)
Dividend Yield: 3.27%
ROE: 5.06%
Performance (YTD): 25.16%
Dividend Growth Rate 5yr Avg: 3.95%
Dividend Payout Ratio: 375.00%
Consecutive Div. Increases: 16 years
Dividends paid since: 1993
The payout ratio of this stock is too high and so dividend is unsustainable. Expect dividend cut.

Frontier Communications Corporation (FTR: 8.76, 0.23)
Dividend Yield: 8.78%
ROE: 37.76%
Performance (YTD): 19.44%
Dividend Growth Rate 5yr Avg: -1.25%
Dividend Payout Ratio: 214.00%
Consecutive Div. Increases: 0 years
Dividends paid since: 2004
Frontier recently cut its dividends. The company has done a good job under CEO Mary Wilderotter of milking profit from a declining fixed-line telecom business. The company recently ratcheted back its payout as it beefs up operations recently purchased from Verizon. However, I cannot consider this stock as a secure dividend stock.

Emphasis added by the owner of this blog.
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McDonald’s (MCD) became a dividend play for a lifetime a few months ago highlighted by Jim Royal in his regular posts at Motley Fool.

He is back today to recommend another dividend play for a lifetime. The company is Microsoft (MSFT). Microsoft has been an exceptional dividend star over the past few years. It has fattened its dividend on average by 15% over the past five years — a clean double in that half-decade. That’s a solid gain, but it looks like Microsoft has plenty more increases in store. While its yield stands at 2.6%, well above that of the average S&P stock, it’s not the stuff of legend. But as an income investor, you need to balance high yield with high dividend growth. The growth rate is as vital as the dividend.

Another dividend paying companies which meet criteria to be selected and added to a dividend portfolio:

Source: Capital IQ, a division of Standard & Poor’s.
Frontier dividend reflects recent change down to a $0.75 annual dividend rate.

Microsoft and Johnson & Johnson both offer lower yields, but with their excellent consumer franchises (despite J&J’s current problems) they have greater potential for high year-after-year increases.

Annaly has been pumping out mighty dividends over the last couple of years. As interest rates plummeted, Annaly’s net interest margin fattened, as did its payouts. Annaly could be a great play as long as low inflation remains, but the company is monitoring interest rates closely. If and when rates increase — more likely, skyrocket — the company could see a disruption in those payouts.

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One of the most common issues that dividend investors face is the holding period for their dividend stocks. It seems that dividend investors are divided in two camps on the issue. One of the camps believes in active allocation of capital, where positions are continually adjusted depending on company performance, market performance or relative portfolio weights, to name a few reasons. In an era where it is possible to buy and sell dividend stocks within nanoseconds, holding on for more than a few years seems like eternity to some. The other camp is focused on the long-term holding of dividend stocks. The second camp believes in buy and hold investing, an arcane strategy, which is termed obsolete during bear markets, but is widely praised during bull markets. So what should the holding period of an enterprising dividend investor be?

In most cases, it takes time for a position to work in your favor. This is particularly true for dividend growth stocks, where low current yields coupled with strong dividend growth result in substantial yields on cost after several years of patience. Investors who focus on stocks like Procter & Gamble (PG: 62.17, 0.31), McDonald’s (MCD: 75.65, -0.45) or Johnson & Johnson (JNJ: 63.29, 0.06) despite their current yields, could generate sufficient dividend income streams over time.
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Many investors ignore dividend investing, because they associate them with boring unexciting investments which are destined to fall into oblivion.

Some investors believe that rather than wait for a whole year to collect a 3%-4% dividend, you could make 3-4 % per day in the market trading volatile technology stocks. The fact of the matter is that few if any investors could accurately forecast stock market moves in order to profit from large daily swings in some of the most volatile stocks in the market today. Dividend payments on the other hand are much less volatile than stock prices, which is what makes them ideal for investors who plan to live off their investments. The stability of the payments makes them a reliable source of income in virtually any market, without having to sell a portion of one’s portfolios and exposing yourself to market fluctuations.
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Dividend-paying stocks are appealing because they have a track record of beating the broader stock market. Focusing on the most undervalued names of the S&P’s so-called dividend aristocrats means investing in the most undervalued companies.
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