Money Talks

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Chuck Saletta

In the children's game "Telephone," a message gets whispered around a circle. By the time that message gets back to where it started, it's typically a garbled mess with almost no resemblance to what it was originally.

Unfortunately, that game often has a scary resemblance to how communication works in the business world. Even folks with the best of intentions look to "manage the message" in order to blunt the personal impact of bad news. By the time unpleasant information makes it all the way through a large organization, it may look completely different than it did when it started.

So what?
As a result, it's tough to take anything a company spokesperson says at face value, especially when it comes to bad news. Even if they're not intentionally lying to you, by the time the message gets to them, it has been repeated and "managed" enough to bring out the worst aspects of the Telephone game. But unlike that little bit of child's play, when you're investing, there's real money on the line -- yours.

If you want to have any sense of confidence in your investments, you need to look beyond what a company's representative is saying and at what the underlying business is actually doing. Its balance sheet and cash flow statement speak the truth far more clearly than anything anyone associated with the company says. Without massive fraud, you can't fake money in the bank, you can't fake operating cash flows, and you can't fake dividends.

Show me the money!
Of those key metrics, dividends are probably the most critical for shareholders to watch. For the most part, dividends on ordinary shares of stock are voluntary payments. While they represent a tangible reward of ownership, they can be a significant cash drain on a company that's not really performing well. Unfortunately, that means when the going gets tough, dividends can get cut.

It also means that, on top of the cash benefit, dividends represent the clearest bit of communication that you'll get from a company on how it really thinks its business is doing. In a rough economy, a falling dividend indicates that either the company's management didn't prepare for the worst or that it doesn't think things will get better anytime soon. On the flip side, if a company can raise its dividend during this economic nightmare, it means it's really confident about both its current financial position and of its long-term future.

After all, dividends are by and large optional payments, though ones investors watch closely. For a company to volunteer to pay out more money while the economy appears to be collapsing around it requires it to really be certain about its ability to recover and thrive. Take a look, for instance, at these companies:

Data provided by Capital IQ. YOY = year over year.

They've all raised their dividend in the past year, are all still paying out less than half of what they're earning, and have balance sheets with more equity than debt on them. That enables them to weather this current economic storm while still rewarding their shareholders. Their strength is clearly communicated in their dividends. They say that money talks -- and with the way they're able to maintain and raise their shareholders' rewards, these stocks are absolutely screaming.

Buy the best
At Motley Fool Income Investor, we're always on the lookout for the strongest dividend-paying companies in the market. Especially in rocky economic times, the clear message sent by a solid payout is worth its weight in gold -- and at least as much as the additional cash in your pocket.

If you're ready to own stock in the companies that are best able to clearly communicate their strength here and now, then join us today. If you'd like a sneak peek of what businesses have already made the cut, then click here to start your 30-day free trial. There's no obligation.

At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. The Fool has a disclosure policy.

Copyright 2009 Motley Fool

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