These Dividends Are Safe

It's beginning to feel like there are two kinds of dividend stocks out there: those that have cut their dividends and those that are about to.

And who can blame them?

In a credit crisis, companies with large dividend yields are quickly reminded that they are giving away their most readily available form of capital. And when companies' shares are priced as if they won't survive the credit crisis, shareholders sometimes see the dividend cuts as positive developments. After all, wouldn't you rather own shares in a viable company that pays no dividend than in a bankrupt company that declares high dividends all the way down into oblivion?

As a result, we're on pace for the worst dividend cuts since the 1930s, and the stock prices of some companies like Wells Fargo (NYSE: WFC  ) , CBS, and General Electric have actually risen immediately after the news of dividend cuts.

That's all well and good, but what if, like me, you're old-fashioned and want to find some companies that can actually sustain their dividends?

Here's how to find them
We need to identify companies that:

  • Still have earnings.
  • Are paying less than 50% of those earnings as dividends (through the payout ratio).
  • Cover their interest payments many times over with earnings before interest and taxes.

Here are a few that meet those criteria:

Company

Recent Dividend Yield

Payout Ratio

Interest Coverage

Johnson & Johnson
(NYSE: JNJ  )

3.6%

39%

37x

BP
(NYSE: BP  )

8.5%

49%

27x

PepsiCo
(NYSE: PEP  )

3.3%

49%

23x

Caterpillar
(NYSE: CAT  )

5.7%

27%

16x

3M
(NYSE: MMM  )

4.0%

40%

26x

McDonald's
(NYSE: MCD  )

3.6%

42%

12x

Automatic Data Processing

3.7%

49%

38x

Source: Capital IQ, a division of Standard & Poor's.

You'll notice this list doesn't include any eye-popping double-digit yields. Frequently, those sexier yields come from companies that are paying out more of their earnings than they can afford. Or they are leveraged up with debt and laboring under onerous interest payments. While such companies may be tempting, they are often ticking dividend time bombs.

So while the dividend yields in the table above aren't in the double digits, all are higher than 10-year Treasury yields, some significantly so. Stocks that out-yield bonds can be a beautiful, beautiful thing. Not only do you get the current yield, but you also stand to profit from any dividend increases down the road, as well as capital appreciation from currently depressed share prices.

Meanwhile, these companies are easily covering their dividend payments with earnings and aren't straining under ridiculous leverage. This doesn't mean it's impossible these companies will cut their dividends, but they're excellent candidates for further research.

In fact, our dividend experts over at our Income Investor newsletter team have already done their research. They've identified six stocks they believe should lay the foundation for a dividend-rich portfolio. In fact, two are in the list above. I invite you to see their write-ups on those two as well as the other four by taking a free 30-day trial to the service.

Click here to get started. There's no obligation to subscribe.

Anand Chokkavelu does not own shares of any company mentioned. Johnson & Johnson and PepsiCo are Motley Fool Income Investor picks. 3M is a Motley Fool Inside Value pick. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (44)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2009, at 6:33 PM, jsolorio wrote:

    Do you really believe that CAT can sustain its dividend. You should take a look at its quick ratio of .86. They are expecting an annual profit of 1.55 billion and they are paying 960 million out in dividends at the current rate! that's more than your 50% payout criteria.

  • Report this Comment On April 09, 2009, at 8:10 PM, stephen706 wrote:

    How can any article talk about safe dividend plays without including World Wrestling Entertainment (WWE). Paying over 10% currently (12%)

    with no weakness in sight!!! 36 cents a quarter per share.

  • Report this Comment On April 13, 2009, at 11:46 PM, TMFBomb wrote:

    Thanks for the comments. Remember that screens are best used to find candidates for further research....three metrics without further due diligence isn't a sufficient buy rationale. jsolorio, you are right to do further research on CAT...it certainly faces headwinds given its industry. stephen706, WWE didn't make the screen because it's payout ratio is a whopping 179%!

    -Anand

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 871840, ~/Articles/ArticleHandler.aspx, 9/23/2014 10:49:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement