You Should Buy Stocks Just Like This One

There's no getting around it: The past year has been awful for dividend-focused investors.

Companies that not along ago were considered bastions of dividend fortitude -- Citigroup (NYSE: C), Fannie Mae (NYSE: FNM), etc. -- have been slashing payouts left and right. In fact, there were more dividend cuts last quarter than in any quarter since 1991.

And there's plenty of reason to be sore about those dividend cuts: Mind-blowingly thorough research from Wharton professor Jeremy Siegel shows that dividends are a crucial driver of long-term market outperformance.

But rather than spend the rest of this recession hiding under a rock, we dividend-loving investors can profit. Yes, many companies are cutting their dividends, but there are plenty of stocks not only maintaining their dividends, but also growing them.

Spotting the long-haul winners
As the past quarter has shown, cuts happen. But fortunately, identifying dividend payers with sustainable, growing payouts isn't exactly rocket science -- you just need to know what you're looking for.

Companies with long, uninterrupted histories of dishing out dividends typically share these three traits.

1. They rake in cash.
Dividends are usually funded with free cash flow, which means that prodigious cash generation and dividend safety go hand-in-hand. Dividend all-star Procter & Gamble (NYSE: PG), for example, converts around 16% of its revenue into free cash. That stellar profitability has helped to fuel 52 consecutive years of dividend growth.

2. They aren't cyclical.
During boom times, profits in a cyclical industry flow like a Saudi oil well, often leading management teams to overcommit to higher dividends and large capital projects. When a cyclical industry tightens up (and they always do), cash profits follow suit, and once-high dividend payouts quickly find themselves on the chopping block.

3. They are conservatively capitalized.
Even well-run companies that aren't in cyclical industries can occasionally find themselves on the outs. Look for companies that consistently produce operating profits well in excess of their debt obligations.

By looking out for companies that demonstrate these qualities, you're setting yourself up to find the next great dividend winner.

A company that recently caught my eye -- and that demonstrates these three qualities -- is Motley Fool Income Investor recommendation Republic Services (NYSE: RSG). Republic is currently wound up in a love triangle with peers Waste Management (NYSE: WMI) and Allied Waste (NYSE: AW), which means the shares should see a lot of volatility in the near term. But as we'll see, there's a lot to love about this business model.

Trash and cash
Republic, the nation'sthird largest waste hauler, operates in a pretty mundane industry. But your trash is Republic's cash -- the company turns about 10% of its revenue into free cash flow and pulls in operating profits about six times that of its interest expense. And as those of us who routinely lug our trash to the curb can attest, waste hauling is far from a cyclical industry.

See, owning shares of Republic is a bit like a having a stake in a collection of small near-monopolies. Building a landfill requires a lot of cash, involves miles of red tape, and faces intense blowback from the locals. These challenges keep competition at bay and help to lead to consolidation in the industry.

It gets better
Unlike with oil, gasoline, and other high value-to-weight commodities, it doesn't make economic sense to haul trash over long distances. That means you don't have to worry about distant competition threatening your localized pricing as it often does in other industries -- think of the video rental business before and after Netflix (Nasdaq: NFLX).

Now, take the ability to set local prices with minimal competition, and combine it with the rational pricing of this consolidating industry, and it's little wonder that Republic, Waste Management, and Allied Waste are able to push around their customers. For its part, Republic has increased its prices 7% over the past year.

Dumping it all together
There's a lot to love about such sturdy, growing dividend payers -- just ask Republic's largest investor, Microsoft's Bill Gates. Republic is typical of most Income Investor recommendations: strong, well-managed, and boasting healthy cash flows and a sustainable dividend.

On the surface, there isn't much pizzazz to dividend-focused investing, but as Jeremy Siegel's research and Income Investor's results have shown, the strategy is a proven winner.