It’s not as simple to find safe dividend-paying stocks as it used to be. Many of the supposedly safe ones have plummeted in price, and their dividends have been slashed. These include the stocks of CBS Corp., Citibank, Dow Chemical, General Electric, General Motors, JPMorgan Chase and Pfizer, all of which have cut dividends by 50% or more. But there still are powerful stocks out there that can be counted on for reliable income and that are resistant to market plunges.

Here are the secrets for choosing the best dividend-paying stocks today…

FOCUS ON THE SURVIVORS

Investing in dividend-paying stocks is certainly riskier than in the past, but it still is the most dependable way to reduce or eliminate stock losses and benefit from a company’s health. Dividends are real money, a spendable return on your investment.

If a company has remained healthy and profitable… continued its dividend payments through this recession, which is the worst economic downturn since the Great Depression… and suffered smaller losses than the Standard & Poor’s 500 stock index in 2008, its stock likely can handle nearly anything.

Even with the blowup in financial industry stocks, my portfolio of high-quality, dividend-paying stocks lost only about half as much as the S&P 500 last year. Over the past 15 years, it has returned 10.9% annually, on average, compared with 6% for the index. If stock price gains are weak in coming years, as I expect them to be, stocks with strong dividends will continue to do better than the average stock because of the cash payouts.

CHECK THESE KEY MEASURES

I use several measures to determine that a company is strong and that the dividend won’t be cut in the future. Only a few dozen stocks make my cut at any time.

Look for “undervalued” stocks. Investors aim to buy low and sell high, of course, but how does an investor figure out what’s a bargain? Price is not the best clue in the ultra-volatile stock market, in which jittery investors can send the price of many stocks bouncing up and down by 20% from day to day.

Instead, focus on a stock’s historical dividend yield. Yield is a percentage figure that reflects the annual dividend amount divided by the stock’s current price. A stock that pays a $1 dividend and is trading at $20 per share has a yield of 5%. The yield rises as a stock’s price drops and falls as a stock’s price rises.

Over long periods, say 20 years or more, a company’s yield moves up and down in predictable patterns. When a company’s yield reaches its historical highs, my research shows that it is a reliable sign that the stock has bottomed out in price and that wise investors will find it attractive. This assumes that the company meets my other criteria and that the stock price has not plunged so low that the yield tops 10%.

Beyond historically high dividend yield, I look for all of the following…

At least 25 years of continuous dividend payments, although there can be dividend reductions.

At least five increases in the dividend amount in the last 12 years.

Rising earnings in at least seven of the last 12 years.

You can find all of this information for any stock on the firm’s Web site.

Payout Ratio IS VITAL

You also want to be sure there is a strong likelihood that the company will continue to pay dividends at the same or higher levels. The best way to predict this is to look at its “payout ratio,” found in the company’s financial statement. You can find the payout ratio for any dividend stock by typing in the stock symbol at http://moneycentral.msn.com, then clicking on “Financial Results.”

What it means: If a company earns $2 per share and pays out $1 in annual dividends, its payout ratio is 50%. The other 50% of the money typically goes to paying for such things as operational expenses… debt… and research and development. If this company goes through a rocky period and sales decline to, say, $1.75 per share, something’s got to give. The company must either cut expenses or cut its dividend. Companies with low payout ratios — around 50% or less — have a much better chance of maintaining their dividends during economic slowdowns.

Note: Utility companies, which are a favorite of many dividend investors, typically pay out a larger percentage of their profits in the form of dividends than other stocks, so with them I look for a payout ratio of no more than 75%.

MY FAVORITE STOCKS now

These stocks meet all of my criteria, including high recent yields (which may fluctuate day to day)…

Abbott Laboratories (ABT). Shares of this health-care giant lost only 2.5% last year, and it has increased its dollar payout per share for 36 years in a row. The firm has held up better than most other pharmaceutical companies because it is less vulnerable to the loss of patents on drugs and has a highly diversified product line that includes medical equipment and nutritional liquids for infants and adults. When the yield tops 3%, Abbott stock is a bargain. Recent share price: $47.89. Recent yield: 3.4%. Payout ratio: 47%.

Altria Group, Inc. (MO). Many investors are repelled by a company that promotes smoking, but from a dividend seeker’s perspective, Altria is the most attractive stock in the S&P 500. This leading US tobacco manufacturer, whose brands include Marlboro, pulls in $15 billion a year in cash and continues to win or settle court cases that try to restrict its ability to sell its products. The stock is a bargain when its yield tops 6%. Recent share price: $16.38. Recent yield: 7.7%. Payout ratio: 54%.

Atmos Energy Corp. (ATO) is the nation’s largest natural-gas distribution utility, with 3.2 million customers in 12 states, including Virginia, Texas and Colorado. The stock is a bargain when its yield is 5.6% or higher. Recent share price: $23.41. Recent yield: 5.6%. Payout ratio: 65%.

Colgate-Palmolive Co. (CL). Shares of this well-known producer of ­personal-care products dropped just 10% in 2008. Moreover, it has paid uninterrupted dividends since 1895 and increased the size of its dividends every year since 1963. The company’s dominance in the global market for toothpaste and toothbrushes is likely to continue because consumers typically are loyal to the oral-care brands they choose. The stock is a bargain when its yield tops 2.8%. Recent share price: $58.79. Recent yield: 3%. Payout ratio: 41%.

Emerson Electric Co. (EMR) is a global technology and engineering company that designs products ranging from digital sensors for oil refineries to state-of-the-art garbage disposals and home thermostats. Although its stock price was beaten down 34% last year, Emerson still did better than the S&P 500 stock index and has an excellent long-term record of gains. The company has raised its dividend for 53 straight years. The stock is a bargain when its yield tops 4%. Recent share price: $27.93. Recent yield: 4.6%. Payout ratio: 40%.

Johnson & Johnson (JNJ), the health-care behemoth, has increased its dividend level for 46 consecutive years. Its diverse product lines provide unusual stability — it operates more than 250 businesses that make a range of products, including the arthritis drug Remicade, Tylenol, Listerine and Splenda sweetener. The stock is a bargain when its yield is 3.5% or higher. Recent share price: $53.01. Recent yield: 3.5%. Payout ratio: 39%.

United Technologies Corp. (UTX). The construction and aerospace company manufactures Otis elevators, Pratt & Whitney engines and Sikorsky helicopters. With a backlog in orders worth nearly $60 billion, the company’s dividend payments are very sustainable. The stock is a bargain when its yield tops 2.2%. Recent share price: $42.60. Recent yield: 3.5%. Payout ratio: 26%.

DIVIDEND STOCKS TO AVOID

S&P 500 stocks that offer huge dividend yields — 10% or higher — typically are having big problems. It means that investors have lost faith in the future of the company and sent the stock price plunging. It’s unlikely that the company is strong enough to keep paying its high yield.

For example, shares of the photography giant Eastman Kodak, whose stock trades at less than $4 per share, recently had a yield of 12% — but sales in the company’s traditional film business continue to decline, and it faces much stronger rivals in its digital business.

Many S&P 500 financial companies, such as Bank of America, US Bancorp and Wells Fargo (all three of which have slashed their dividends), have very low stock prices and will not be allowed to fail by the federal government. But recovery will be rocky, and the odds simply are not in your favor.

Right now, there are a lot safer and easier stocks to choose for income. Don’t be tempted to buy shares in heavily wounded dividend stocks in hopes that their stock prices will soar.

Source: Kelley Wright, chief investment officer and portfolio manager at Investment Quality Trends Private Client Asset Management, Carlsbad, California. He also is managing editor of the dividend-stock investing newsletter Investment Quality Trends (2888 Loker Ave. E., Ste. 116, Carlsbad, California 92010, 24 issues, $310/yr., www.iqtrends.com).

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