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Two Dividend Stars to Buy Now


Finding a big yield isn't the true measure of a quality income stock, so take your time in choosing since good dividend payers should be very long-term choices.


Regardless of what other factors you consider as part of your investing system, there are a few good metrics for everyone to keep in mind when considering buying dividend-paying stocks for income.

The first is to simply look at the dividend itself: How long has the stock been paying a dividend? Has it ever been cut? How often has it been raised? Companies that can pay or, even better, increase their dividends quarter after quarter and year after year are more likely to continue doing so in the future.

One easy way to find these stocks is to look at Standard & Poor's list of "Dividend Aristocrats," which are stocks that have increased their dividends every year for at least 25 years. The list currently comprises an impressive 51 companies, from 3M (NYSE:MMM) to Walgreens (NYSE:WAG).

Bedspring inventor Leggett & Platt (NYSE:LEG) was the latest Dividend Aristocrat to be recommended in the Dividend Digest. In the September 10 Dividend Digest Daily Alert, Investors Intelligence Editors Michael Burke and John Gray wrote: [LEG is] "only $3 away from its highest level since 2007. Breaking through there would open up the door for a move toward the all-time high of $30.68 from 2004. Overall, a clear primary uptrend, underpinned by trend line support, is underway since the March 2009 low."

Since then, LEG has moved tantalizingly closer to its multi-year high at $26 and could actually break that level at any moment. Plus, being a dividend aristocrat, LEG has paid a dividend every quarter since the last quarter of 1987, and currently yields about 4.5%. Oh, and it doesn't just make bedsprings anymore, the company is a diversified manufacturer of everything from steel wire to office chair bases.

Of course, history isn't the only indication of a dividend's safety. Another metric that income investors will find very useful in analyzing dividend-paying companies is free cash flow.

Free cash flow, simply, equals operating cash flow minus capital expenditures. In other words, it's what's left of income after the company spends what is has to. That number is important because, when all is going well, it's where the money for dividends come from. (Companies that can't afford to pay their dividends out of free cash flow are forced to either cut them or find the money elsewhere, which is usually only a temporary solution.)

Digests contributor Ingrid Hendershot of Hendershot Investments wrote about the importance of free cash flow earlier this year, writing: "Firms with strong free cash flows can invest in internal growth programs, fund acquisitions and provide consistent, value-creating returns to shareholders through growing cash dividends and share repurchases at attractive valuations. By following the cash a company generates, investors may determine if management is allocating the capital in shareholder-friendly ways."

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No positions in stocks mentioned.
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