Dividend stocks are a very good source of security. Most companies that offer dividends are well placed financially and they are looking for cash-yielding equities. These companies also usually have better accounting practices and show a more caring attitude towards their shareholders. This is reassuring to people who purchare dividend stocks from the company, considering the number of companies that are being investigated for accounting issues today.

 Also, dividend-paying stocks are less risky than stocks with no income. Dividends provide a backup source of money in lean times since they are usually consistent sources of income for the shareholders.

Another plus about dividends is that there has been recent tax cuts on dividends. The maximum tax on dividends is fifteen percent. You can also reinvest your payouts in the form of stock shares without having to pay your broker a commission.

The first sign of a good dividend is if the company has lots of cash. Make sure the company has a lot of cash and that the dividend is coming from the excess cash flow. After shareholders are given their dividend payment that should still be enough money for capital spending, acquisitions, research and development. You can determine the amount of cash a company has by looking at their payout ratio or the percentage of the earnings they use to pay the dividends over time.

A second sign is an extreme in the companies yield. If the dividend payment is very high or very low it’s usually not a good dividend. Any company that pays more than five percent on the dividends is probably in distress or involved in risky turnaround situations. If you are going to go with a company that has high yield then make sure they have a large amount of cash flow left over after the high dividend payments.

However, there are exceptions to this rule. Real estate investment trusts and master limited partnerships have high dividends because they have return on their capital to cash earnings that help them provide high dividend payments. Most other stocks just use regular cash income.

 A third and final sign is a company that has constantly raised their dividend. If a stock has had an above-average rate of dividend increase then it is probably not a good dividend to go with.

Using these three signs you can generally distinguish good dividend with high payments from the bad dividends with low payments. However, always pay attention to the exceptions to the rule.