Dividend Stocks: 2 to Buy, 1 to Avoid

Image: Apple.

Income investors have been hungry for dividend stocks, with their high yields offering respite from the rock-bottom interest rates on bonds, bank CDs, and other traditional fixed-income investments. Yet not all dividend stocks are created equal, and even a dividend payer with a high yield isn't always a smart buy for investors who don't want to run the risk of big losses.

With that in mind, let's take a look at three dividend stocks that many investors are finding on their radar lately, and pick out which ones have favorable prospects, and which could be riskier than you think.

Apple looks juicy Apple has been a growth darling for decades, but with a steadily rising payout in recent years, the tech giant has also attracted the attention of income investors. Combined with a hefty stock repurchase commitment, Apple has raised its dividend three times since restarting its quarterly payout in 2012. While its 1.7% dividend yield currently trails the stock market average, the i-device maker has plenty of capacity for further increases in the future.

Recently, Apple stock has taken a hit, as a tepid earnings report for the company's fiscal third quarter raised concerns about how much further the tech giant could grow. Nevertheless, Apple's value proposition remains solid, with an earnings multiple in the low teens, and tens of billions of dollars in cash available for further strategic moves.

Even if Apple's growth engines do start to cool, its ability to bring in consistent cash flow from its existing stable of devices could last for decades. That, by itself, could sustain healthier streams of dividend income far into the future.

General Motors is revving its enginesThe auto industry has recovered strongly from the financial crisis, and General Motors has emerged as a dividend powerhouse. The Detroit giant currently pays a 4.6% dividend yield, and it has been especially aggressive in boosting its quarterly payment, with a 20% increase earlier this year after just starting to pay a dividend in 2014.

Image: General Motors.

General Motors has benefited from the miscues of its biggest rival, with gains for the Chevy Silverado taking advantage of production issues that have plagued the industry-leading F-150 and its new aluminum-made model. In particular, General Motors has stepped into the gap, and fulfilled demand for fleet sales to rental-car companies, large commercial operators, and other businesses with substantial vehicle needs.

At the same time, GM's slate of full-size SUVs have seen demand soar as lower fuel costs make them cheaper for drivers to use. The impact on General Motors' profit margins has been wildly positive, and that, in turn, could support further payout boosts in the future.

Transocean could come up dry Offshore drilling companies have done a good job of taking advantage of the oil boom during the past decade, and Transocean had done a good job of passing on its gains to shareholders. Yet even though the company sports a 4.5% yield, Transocean slashed its dividend payout by 80% earlier this year, and some remain concerned that further losses could force the company to cut its payout entirely.

Transocean's long-term strategy involves scrapping some of its existing rigs while trying to defer delivery on some of its newly ordered vessels, and that might be enough to keep its existing fleet hired at reasonable dayrates. That might be good enough to get through any liquidity troubles; yet with energy prices remaining stubbornly low, and major oil production companies starting to take larger hits, dividend investors can find more stable prospects than Transocean going forward.

Dividend investors have to be careful to make sure they look beyond an attractive yield, to the underlying business. In some cases, a low-yielding stock has huge potential for growth, while higher-yielding stocks can hide long-term problems that could threaten the payout in the future.

The article Dividend Stocks: 2 to Buy, 1 to Avoid originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and General Motors. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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