Are Ares Capital and Apollo Investment good investments since they both are paying a high dividend?

Billygtr answered one year ago …

Before anyone rushes out willy-nilly and buys the first stock with a monster dividend they see, they ned to ask themselves "Is the dividend safe?" That is, will the company be able to pay the dividend as profit growth slows as the market searches for a bottom? A high dividend rate can signal a company without a firm grasp on reality as often as it can alert potential investors to a good buy in a down market, because declining share value raises the dividend percentage, all other things being equal. So how is the investor to discriminate between a stock with a safe dividend and a stock whose dividend will have to be cut as profits decline?

The best way to answer this is to repeat the educational tips of money managers that I've been watching, since I am by no means a market professional. As with any advice, you should always do your own homework - "due diligence" in market terminology - and have an exit strategy before taking a position.

Jim Cramer of TheStreet.com and the daily Mad Money show on CNBC has called the phenomenon of higher dividend rates as stock prices decline "artificially high" dividends. David Peltier, portfolio manager for TheStreet.com's Dividend Stocks Advisor, also addressed this issue in a video on 1/10/09 at TheStreet.com. Both the Mad Money archives and the video section of TheStreet.com are accessible for free, and I recommend both as educational resources, if not necessarily for actual trading tips. As the disclaimer goes, "your results may vary."

Peltier's "Find the safe dividend stocks" video is the more concise reference on the subject. The first metric to find on the company's balance sheet is earnings coverage; specifically whether earnings are twice the current dividend. Be careful to look at future earnings, don't be misled by TTM earnings (trailing twelve months) but use forward earnings projections. Both he and Cramer note that companies that have a history of increasing dividends in both bull and bear markets will be less likely to cut them in the future.

The second metric Peltier says to scrutinize is whether the company has more cash than debt. This provides a bit of security for the dividend should future earnings take a swan dive. As an example of a stock that's been recently beaten down with a secure dividend he uses AT&T (T) which as of Saturday offered a 5.8% dividend yield.

Cramer has said that traditionally, the last thing a company wants to do is to cut its dividend, since that's a major attraction for potential investors and an indication of company stability. And in a down market, a company's dividend will help offset any losses caused by declining share price, so looking for safe dividends is a smart move, if you're a potential investor. As Cramer says, "they'll pay you while you wait."

I haven't the time to research Ares Capital and Apollo Investment, but since it's your money, you should be doing that yourself. I hope the info I've relayed helps you with that research.