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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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This week’s (5/23) investing column

DIVIDEND investors will want to check out an easy-to-read new book by investment author and manager Charles B. Carlson.

Carlson’s “The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns” both shows the importance of dividends in total returns and guides investors through characteristics to look for when searching for yield.

As the author points out, dividends have accounted for about 40 percent of the total return of the S&P 500 index. People who have reinvested their dividends have done even better. Rising dividends also serve as a nice hedge against inflation.

Now is a particularly opportune time to focus on dividends because of their favorable tax treatment–15 percent of qualified payouts. Even if that changes next year, Carlson advises investors to continue to seek out companies with solid dividends.

Companies that promise to pay dividends need to be confident in their futures, as it looks bad to cut or eliminate a payment. Investors should be comforted by that level of confidence, especially among companies with a long history of making good on it.

But investors shouldn’t necessarily choose stocks with the highest dividend yields, Carlson cautions. When a yield gets too high, that’s usually because the stock price has fallen. Sometimes investors have gotten it wrong, but often a high yield is a cautionary tale that the dividend is unsustainable given the level of profits that the company is taking in.

The book urges investors to avoid stocks with dividend yields significantly higher than most companies in their sector. It also tells people to pay attention to the payout ratio–which is the percentage of profits paid out as dividends.

If the payout ratio creeps toward 100 percent, that means the company probably won’t be able to keep making the payments. Carlson cautions investors to avoid stocks whose payout ratios are above 60 percent.

He also advises that investors look for healthy companies with good growth prospects that will enable them to continuously increase the dividend.

Thus a company with a 2 percent yield and solid growth is a better bet than a firm yielding 5 percent that has little growth ahead. In time the company yielding 2 percent may pay out more than the 5 percent firm.

Carlson also shows investors how they can create a stock portfolio that will ensure they receive a dividend payment every month. He touches briefly on other forms of high-yield investments, and discusses dividend opportunities in international stocks. He tells about companies with programs for direct stock purchases, sometimes at a discount to the price.

Investors interested in seeing specific recommendations using this quite logical method of analysis can go to bigsafedividends.com, a companion website for the book. It requires a registration but is free to use. The site ranks stocks based on yield, payout ratio and qualitative scores measuring growth prospects.

Like other books in the useful “The Little Book” financial series, Carlson’s is an easy read that can be finished in just a few hours. It’s definitely recommended for people who look for dividend-paying stocks.

Permalink: http://news.fredericksburg.com/businessbrowser/2010/05/23/this-weeks-523-investing-column/