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5 Dividend Stocks, 4 With Earnings to Keep Paying

Stocks in this article: GNTXGRMNTROWPAYXAEO

NEW YORK ( TheStreet) -- Buying dividend-paying stocks has many advantages. Historically, dividendpaying stocks outperform non dividend paying stocks. Each time a dividend is paid, the total capital at risk decreases. If a stock dividend is 3% and the company never adjusts their payment up or down in real dollars (not likely, but we will assume so for illustration purposes) the company will pay you back in full for your purchase in about 23.5 years. At 4%, it takes less than 18 years.

Investors always have to be cautious when reviewing high-yielding stocks. Dividends gained have been known to vaporize quickly into losses with companies that cut back the payment. A company's board of directors generally authorizes dividend payments every quarter, and there are no rules that say they must continue payments if they do not believe dividend payments are in the best interest of the shareholders and company.

Garmin might not be a first pick for a stock to buy for dividends, but is a good one to watch.

Here we are looking at stocks offering a good yield, no debt and with ample profits expected to keep the dividend revenue steam flowing. Similar to any other company, the situation can change rapidly resulting in greater or lower returns.

I sorted the list based on the size of the company:

American Eagle Outfitters (AEO) together with its subsidiaries, operates as an apparel and accessories retailer in the United States and Canada. American has more than $3 billion in sales per year, with rising revenue. The payout ratio is 57%, forward-looking annual dividend is 44 cents per share, for a yield of 2.2% and there's $53 million in total free cash flow for 27 cents per share.

Paychex (PAYX) provides payroll, human resource and benefits outsourcing solutions for small to medium-sized businesses and trades an average of 2.9 million shares per day. Paychex has more than $2 billion in sales per year with rising revenue. The payout ratio is 84%, forward-looking annual dividend is $1.28, for a yield of 4.3%, $166 million in total free cash flow for 46 cents per share. Without question, the payout ratio of 84% raises a red flag. The large payout in relation to the earnings is mitigated by a net income growth rate of 8% and a price to earnings ratio under 20. Unless Paychex hits a bump in the road, the payout rate should drop below a comfortable 50% in six to nine months.

T. Rowe Price Group (TROW) is a publicly owned asset management holding company. The firm provides its services primarily to individual and institutional investors, retirement plans and financial intermediaries. T. Rowe trades an average of 1.5 million shares per day. Paychex has more than $2.75 billion in sales per year, with rising revenue. The payout ratio is 43% and the forward-looking annual dividend is $1.36, for a yield of 2.2%. There's $548 million in total free cash flow, for $2.08 per share.

Gentex (GNTX) designs, develops, makes and markets electro-optical products for the automotive, commercial building and aircraft industries, primarily in the United States, Germany and Japan. Gentex trades an average of 2.3 million shares per day. Gentex has revenue of about $1 billion per year, with quickly rising revenue. The payout ratio is 41% and the forward-looking annual dividend is 52 cents, for a yield of 2.3%. Gentex, unsurprisingly with the level of growth it is experiencing, is investing heavily in capital expenditures. As a result, the free cash flow is negative $46 million in total free cash flow, for negative 32 cents per share. A negative free cash flow raises a red flag, but given the performance of the company in both rising revenue and earnings it doesn't appear to be putting the dividend in danger. The cash flow is a victim of remaining debt free, which appears to be working really well.

The next stock I include to demonstrate what a yield trap may look like. The dividend yield doesn't appear too high, but the falling income year over year will have to be stopped or it will have to lower the dividend. If the company lowers the dividend, the stock, of course, will likely drop like a stone. This becomes a cruel circle for investors because when a company lowers the dividend payment once, they often lower again with promises of a turn-around soon. Rinse and repeat until the shares are worth 40% or less than what investors paid. The company:

Garmin (GRMN) was founded in 1990 and is based in Schaffhausen, Switzerland. Shares trade at an average of 860,000 per day. Garmin wouldn't be my first pick for a stock to buy to collect dividends with, but is a good one to watch now due to the large 76% payout of earnings to dividends and the falling net income. Garmin's forward-looking annual yield is 3.8% and may look attractive. Don't fall for it unless you believe Garmin is not going to continue to trend lower with top- and bottom-line earnings.

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