Investing in value dividend stocks leads to gains—if you avoid stock picks that have high, but unsustainable, dividend payouts

One of the best ways to pick value dividend stocks with sustainable dividends is to seek out companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings and create press releases to appear to be making progress, but they cannot fake dividends.

Note, though, that investors should avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). That’s because high yield can sometimes be a danger sign rather than a bargain.

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Look beyond a high dividend yield to discover safer, more profitable value dividend stocks

Value stocks typically offer a high dividend yield. That means their dividend payouts are high in relation to their individual stock price.

We’ve always placed a high value on dividend stock investing at TSI Network, mainly because it provides something of a measure of safety for stocks we recommend.

It takes a lot of success and high-quality management for a company to have the cash to declare and pay a dividend every year for five or 10 years or more. It’s not something you can create on the spur of the moment.

As mentioned earlier, when looking for value stocks, you should avoid the temptation to reach for yield. That is, choosing investments solely because they offer a high dividend yield.

A high dividend 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.

Above all, for a true measure of stability, focus on high dividend companies that have maintained or raised their dividends during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

Find value dividend stocks involved in stock buybacks and receive even more value from your investment

Stock buybacks raise a company’s earnings per share. It’s simple arithmetic: buybacks reduce the number of shares outstanding. To get earnings per share, you divide total earnings by the number of shares outstanding. When you reduce the divisor—because the company has fewer shares outstanding, due to stock buybacks—the calculation gives you a higher number for earnings per share as an answer. On the whole, buyers are willing to pay slightly more for a stock with slightly higher earnings per share.

Furthermore, when the company engages in stock buybacks, it bids up the price of the stock.

The advantage of stock buybacks expands all the more if you hold off on selling until you need the money. That holding period may last until you retire, when your income tax rate is likely to be lower.

Be wary of economic forecasts when you consider value dividend stocks, so you can make better decisions and avoid losing money

You need to avoid putting too much faith in the stock market as an economic forecaster. Sometimes the market gives advance warning about coming recessions and economic bubbles. Other times, it predicts economic bubbles that never come. (This, by the way, is true of any economic forecast.)

Up to a point, national and world economies are self-correcting. They rise and fall in a series of spurts and setbacks. The setbacks always show some sign of turning into recessions. They rattle investors and upset the market. But few ever lead to serious, lasting damage.

The most experienced, successful investors feel skeptical, if not downright cynical, about economic forecasts, for three reasons:

1. Fame as an economist has little to do with forecasting skill.
2. Accurate economic forecasts are rare—certainly rarer than profitable stock market recommendations. There are simply too many economic factors interacting in too many ways. That’s why nobody guesses right every time, and even the best economists can be right on in one year and dead wrong the next.
3. Even when an economic forecast is right, it still may not offer helpful investing advice. That’s because the stock market anticipates economic trends much better than any economist, and moves up and down ahead of them.

All in all, follow our three-part Successful Investor strategy to find the best value dividend stocks

1. Invest mainly in well-established companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

What experience do you have with dividend stocks that lost value after you invested in them?