NEW YORK (TheStreet) -- Dividend stocks are your path to wealth building. More important, they're the key to maintaining your mental fortitude when the market is in a downturn. If you buy a non-dividend paying stock, you're only ability to profit is when you sell.
The problem faced by most investors is that the time between buying and selling is often filled with peril. I'll use the exchange-traded fund index SPDR S&P 500 (SPY) to illustrate. The SPY appreciated over 20% during the last year. On Monday, the index traded at a new all-time high.
Fueled by our currently raging bull market, both Apple (AAPL - Get Report) and Adobe (ADBE) soared over 50% in the last 12 months. Apple features a 2% dividend yield and Adobe pays zero. Both are well-known technology stocks, but what happens if Monday's market high is the top?
A 30% market retracement is common, even in a bull market. If you buy Apple at the top at least, you collect a better rate than the bank pays. Also, the further Apple declines, the more attractive it becomes for yield seeking investors. On the other hand, if Adobe shares decline, shareholders have nothing to look forward to other than unrealized losses and possibly a stop-loss at the worst possible time.
That's why dividend-paying stocks not only treat your portfolio right, they make investing palatable for the risk averse. Want more proof? Take a look at my suggestions a year ago this month for DuPont (DD), Wells Fargo (WFC), and General Electric (GE). The group outperformed the market and shareholders received dividend checks while experiencing lower volatility.
Here are four to consider:
Background: Microsoft (MSFT - Get Report) develops, licenses, and supports a range of software products and services. The company's shares are liquid and trade an average of 23 million shares per day and the company has a market cap of $339 billion.
52-Week Range: $30.84 to $41.66
Price To Book: 3.9
Forward Estimated Earnings Payout Percentage: 38%
I can't say enough good things about Microsoft. I probably have over a dozen articles touting its bull thesis and why it's such a value. In the last 10 years, revenue and profit went on a one-way journey upward while the market more or less shrugged its shoulders.
The only declining metric is the number of outstanding shares. to under 8.3 billion shares this year from over 10.7 billion shares in 2005. The traditional software model is changing, however; the company is successfully transitioning into a leading cloud computing services provider and video game platform maker.
Microsoft pays $1.12 for an effective 2.7% yield. The next ex-dividend date isn't until August, so if you sit on your hands and wait for a market drop you can probably catch it below $40 and capture a slightly higher yield. I would forget about it at that point and just let the dividends continue rolling in.