Solid Dividend Stocks

Not everyone pays close attention to dividends, but for those that do the suspension of BP LC's (BP) dividend this summer may have raised questions about the stability of dividends. While BP's dividend elimination was due to a catastrophic event that would be nearly impossible to predict, it underscores the notion that no dividend is completely safe. Dividends (much like share repurchases) are at the discretion of management. While dividends are often believed to impose an extra level of discipline on management, with consistent and growing dividends sending positive signals to long-term investors about the stability and financial strength of a company, there is no guarantee that firms paying dividends today will be able to sustain or grow that payout over the longer term.

While there are myriad ways to screen for solid dividend payers, we think that looking at the holdings of our Ultimate Stock-Pickers, and separating the widely held firms that have wide economic moats and low to medium uncertainty from the rest of the pack, could offer up some interesting opportunities for investors. Companies with wide economic moats tend to reside in profitable industries and have long-term structural advantages that allow them to keep competitors at bay for longer periods of time, generate more predictable earnings and cash flows, and have returns on capital that exceed their cost of capital. A low uncertainty rating on a firm means that our analysts believe they can estimate future cash flows with a greater degree of confidence than companies with higher uncertainty ratings.

Source: Morningstar.com

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