Putting the "Safe" in Safeway

The Foolish fundamental investor always has his or her radar tuned for a few key things. Higher earnings and cash flow top the list, but dividend increases -- though less celebrated -- are no less important. Motley Fool Income Investor chief Mathew Emmert is fond of saying that higher payouts usually foreshadow business improvements and stock gains. Considering that S&P 500 dividend payers have outperformed non-payers for decades, I'd say he's probably right.

That's why I'm encouraged by last night's news from Safeway (NYSE: SWY  ) . The troubled grocer announced that it would initiate a quarterly dividend of $0.05 per common share, or $0.20 annually. Payments will begin with the second quarter; all stockholders on record as of June 16 will receive a payout. The dividend is expected to cost Safeway $90 million annually.

The grocer's 0.89% yield isn't going to turn heads, but it isn't bad, either. The annual cost of the payout is easily covered by the company's projected minimum 2005 free cash flow of $500 million.

That's not to say you should invest. A dividend, no matter how appealing, should never be enough to entice you into a stock purchase. Safeway has been anything but stable; bitter labor disputes and increased competition have rendered the grocer an interesting short over the past year.

Still, as fellow Fool Timothy Otte pointed out earlier this month, the grocer is upgrading its stores and offering more premium food choices and prepared meals. That should help it differentiate from low-cost piranhas such as Wal-Mart (NYSE: WMT  ) and Costco (Nasdaq: COST  ) . Yet the strategy could prove to be a long shot. That's why it's least a little comforting to know that if you do bet on a turnaround, you'll get paid to wait for the results. Indeed, as far as investors are concerned, Safeway is a little safer today than it was yesterday.

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Motley Fool contributor TimBeyers didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.


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