When looking for the top blue chip high-yield dividend stocks to add to your portfolio, be sure to take a close look at each of these factors

We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. Most of these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects, compared to alternative investments.

Blue chip stocks we recommend have a history of earnings and, in most cases, a history of sustainable dividends. They have established their value over the long term. Like all stocks, they can fluctuate widely and many will suffer in a long-term market downturn, but they offer a higher probability of long-term gains.

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The best blue chip high-yield dividend stocks will share these characteristics

• A history of long-term success. These companies are the most likely to keep paying and increasing their dividends.
• A current healthy financial situation for the company. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
• A current dividend. If a company currently offers a dividend, this is a good sign of its potential to continue offering a steady dividend.
• A strong hold within the company’s industry. Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
• Growth and income. The best dividend-paying stocks offer both capital-gains growth potential and regular income from dividend payments.

Watch out for blue chip high-yield dividend stocks with unusually high yields—it could be a danger sign

The dividend yield is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

Note though, that an attractive yield, and especially a very high dividend yield, can give you a false sense of security. That’s because many investors have a tendency to think that all investment income is almost as safe and predictable as bank interest.

The fact is that investment income can dry up suddenly. Money-losing companies are sometimes unable to keep paying a longstanding dividend, and they sometimes spring the bad news on their shareholders with little or no warning.

Investors should avoid judging a company based solely on its dividend yield because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend-paying stock’s yield could be high simply because its share price has dropped sharply in anticipation of a dividend cut.

Blue chip high-yield dividend stocks with above-average growth prospects can play a role in your portfolio

There are some high growth dividend stocks that offer yields that are as high—or even higher—than yields on more-established companies.

Still, you need to focus more than ever on quality when it comes to finding the best high growth dividend stocks to add to your portfolio.

As with conservative dividend-paying stocks, high growth dividend stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

You should always remember, though, that while more aggressive growth stocks may hold the potential for greater gains than conservative selections, they also expose you to a higher level of risk. That’s whether or not they currently pay dividends.

It’s why we recommend that you look beyond dividend yield when making investments in high growth dividend stocks, and look for stocks that have also established a business and have at least some history of building revenue and cash flow.

And as mentioned, a very high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend. Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Use our three-part Successful Investor approach to make better stock picks, and build a top portfolio

We recommend using our three-part Successful Investor approach to make the best stock picks possible:

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

 What is an example of a high dividend that you have seen drop significantly?

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