Purchasing blue chip stocks that pay dividends is one of the most secure and stable places to invest money. No matter what the overall economy is doing, the best dividend paying stocks seem to offer much better returns than other investments. Even if a blue chip stock gets hit by an economic downturn, it is always one of the first investments to recover. Smart investors actually benefit from bear markets and poor economies by snatching up these top level stocks at a discount when everyone else is fleeing the market.
There is no doubt that blue chip stocks that pay dividends can provide the perfect investment opportunity. It is important to remember, however, that not every dividend paying stock is a good investment. There are several indicators an investor should look for when looking for the best investment options.
Blue Chip Stocks that Pay Dividends Criteria
There are plenty of quality dividend paying stocks to go around, but here is a few characteristics that investors can look for.
- Current Dividend Yield - Between 2.5% - 6%
- Price per Earnings Ratio <= 20
- Dividend Payout Ratio <= 50%
- Member of The S&P 500Â® Dividend Aristocrats index
Searching for a current dividend yield between 2.5% and 6% will help to identify some of the most stable high yielding stocks. Companies with a yield above 6% are considered riskier investments as that kind of return will be hard to maintain. Stocks with a yield below 2.5% may not be worth the return and monies could be invested elsewhere.
The price per earnings ratio (P/E) is another good piece of criteria to use in a dividend stock screen. In order to find blue chip companies that pay dividends that are attractively priced, investors should focus on the P/E ratio of 20 or less.
The dividend payout ratio of the best dividend paying stocks is usually below 50%. This equation represents the amount of earnings a company is using to pay the annual dividend. Anything above 50% should be considered a potential red flag to investors.
One of the most trusted and reputable list of dividend paying stocks is published by the S&P 500. Stocks that are found on this list must have raised their dividends annually for at least 25 years. A strong history of dividend increases is a good sign of how well a company is managed and can withstand tough economic times.
LILLY (ELI) & CO. (LLY)
Eli Lilly and Company is a worldwide developer, manufacturer, and seller of pharmaceutical products.
- Current Dividend Yield = 5.76%
- Price per Earnings Ratio = 8.7
- Dividend Payout Ratio = 43.20%
JOHNSON & JOHNSON (JNJ)
Johnson & Johnson is a worldwide research and development company that manufacture and sell a wide variety of of health care related products.
- Current Dividend Yield = 3.38%
- Price per Earnings Ratio = 13.2
- Dividend Payout Ratio = 29.83%
AUTOMATIC DATA PROCESSING, INC. (ADP)
Automatic Data Processing, Inc. outsources several HR related functions including payroll processing, tax and benefits administration, and 401k plan administration.
- Current Dividend Yield = 3.23%
- Price per Earnings Ratio = 15.6
- Dividend Payout Ratio = 41.66%
CLOROX CO. (CLX)
The Clorox Company produces, markets, and sells consumer products worldwide.
- Current Dividend Yield = 3.08%
- Price per Earnings Ratio = 15.2
- Dividend Payout Ratio = 42.42%
PEPSICO INC. (PEP)
PepsiCo, Inc. is a worldwide manufacturer and seller of a variety of drink and snack food products.
- Current Dividend Yield = 2.88%
- Price per Earnings Ratio = 16.9
- Dividend Payout Ratio = 49.83%
Investing for the Future
Investing in blue chip stocks that pay dividends is not a short term investment strategy. Instead, smart investors selectively pick the best dividend producers, buy more shares on dips. Over time, these investors have built a solid dividend producing portfolio that can provide years and years of income with very little risk. Investors who have a short term trading philosophy should realize all of the benefits of investing in dividend paying stocks.