NEW YORK (TheStreet) -- I love dividend stocks and you should, too. Dividend stocks help shield portfolios from the ups and downs of our crazy market filled with weak deflationary fear-ridden economic numbers one day, followed by high food prices the next.
Study after study demonstrates that in the long run dividend stocks build investor wealth more consistently and at a higher rate than non-dividend stocks. Using historical results as our guide to gauge what to expect moving forward, dividend paying stocks offer the best that investing has to offer.
But did you know that the highest-yielding stocks can actually have a lower performance expectation? It makes sense -- the highest-yielding stocks are often the ones that have experienced rapid price declines as a result of deteriorating investor confidence.
So why look at these three companies? Our goal is to find the highest-yielding stocks executing their business model and likely to continue sending the quarterly checks to your mailbox. In my quest, I have created rules or guidelines companies should pass to become a candidate as a long-term hold.
To make the cut, a company:
- Must be liquid and trade with a small bid-ask spread to avoid slippage.
- The company must have a history of dividend payments and increases in payments.
- The company needs to demonstrate the ability to continue paying the current dividend or more.
- The stock chart must be in a bullish uptrend; there is no point in looking for an oversized yield if the shares are expected to drop as much or more in the next year.
How can you take advantage? Make sure the industry and the company aligns well with your investment objectives. Use your current professional knowledge as applicable to ensure you have a market edge when entering or exiting a position.
Remember, your greatest advantage is your ability to limit your exposure to industries you already understand better than the overall market.
Now, let's look at my Big 3.
Simulations Plus designs and develops pharmaceutical simulation software for use in drug research. The company was founded in 1996, has a market cap of $102 million.
Price To Book: 6.6
Dividend Yield: 3.3%
Forward Estimated Earnings Payout Percentage: 80%
Simulations Plus enables exposure in the pharmaceutical space without losing sleep over Food and Drug Administration results. The company focuses on developing and marketing software that simulates compound interaction within the human body. A fascinating use is the ability to simulate testing on babies.
Because newborns quickly change and grow as quickly as their bodies are able, clinical trials are problematic and full of challenges. The company's software reduces the quantity of variables and does so at a more attractive cost for drug companies.
The software isn't new or experimental and is proven in the field. The FDA Center for Food Safety and Applied Nutrition, FDA Office of Testing and Research, MHRA (U.K.'s equivalent of the FDA), and all of the top 20 pharmaceutical firms are clients.
At first glance, the payout ratio may have you scratching your head. That's because the company literally has so much cash in its war chest that it's only keeping a small proportion of earnings to slowly grow its cash position.
Simulations Plus is a reminder of how investing used to be before day trading and a focus on the next quarter's results. This is a company that makes a great profitable product, and then spins off the excess cash to shareholders. As a result, the high payout percentage isn't as meaningful as it is with other companies.
Instead of the payout ratio warning that this may turn into a dividend trap, it's actually a stealth signal that management is performing well for investors. As an added benefit, this company is small enough that a larger company could bid to buy it at a significant premium.
The company is debt-free, has $10.9 million in cash, and most of its income is distributed as dividends. The gross margin is 84%, and net margin is over 27%. Sales and the number of customers are growing.
Microsoft develops and sells software for computers, mobile devices and video games for consumers and enterprise customers. The company has a market cap of $326 billion, making it one of the largest companies in the world, and trades an average of 34 million shares a day.
Price To Book: 3.75
Dividend Yield: 2.8%
Forward Estimated Earnings Payout Percentage: 32%
Microsoft is a terrific stock to write about. It's a profitable, cutting-edge technology company with legacy products raking in enormous amounts of cash and it's relatively unloved by the market. For dividend investors, stocks that aren't the flavor of the month offer a better return on investment.
We all know what happens when a stock is "hot" -- the price moves higher and the yield drops to the floor. A much better idea than buying a hot stock is buying it before everyone else becomes interested. Otherwise, what you gain in dividends can easily disappear in capital evaporation.
If you're under the false presumption that Microsoft's products are falling out of favor or that revenue is drying up, you're not paying attention.
Microsoft had nothing left to lose when it doubled down in the mobile space as a distant third to Google's (GOOG - Get Report) Android and Apple's (AAPL - Get Report) ecospheres. Part of its new strategy was buying Nokia's (NOK - Get Report) phone division last year, and appears to be paying off
Realizing it needed to adjust and adapt Google's free software strategy to gain market share, it wasn't a surprise when the software giant decided to reduce the price of Windows Mobile to low or no cost for many manufacturers.
The result for mobile is Microsoft's market share numbers are improving for the first time in a long time. Since Microsoft can make money from app sales, giving away free software doesn't mean lower revenue.
Ford produces cars and trucks. The company and its subsidiaries also engage in other businesses including Ford Motor Credit Corporation. Ford trades an average of 37 million shares per day with a market cap of $68 billion.
Price To Book: 3.5
Forward Earnings Payout Percentage: 26%
Dividend Yield: 3.2%
Ford is my favorite auto stock, although I drive a General Motors (GM - Get Report) vehicle. I think Tesla (TSLA - Get Report) makes a stylish electric car, and the Model S may be my next car, but its stock is overpriced compared to the company's prospects.
The best way to describe Ford is the company continuously makes the right moves creating shareholder value. Before the economic downturn, the management had the foresight to borrow enough to avoid a government bailout. The company halted the dividend when things did turn lower, and as soon as the coast was clear, the dividend was reinstated. The gap in the payout ratio reflects the dividend halt and reinstatement.
The stock has appreciated 11% in the last year, and the average analyst target price for Ford is $18.27.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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