3 Strong Dividends From the Market's Biggest, Best Companies

High-yield dividend stocks are all well and good, so long as the dividend is sustainable and the company sticks around long enough to keep paying them out. In an economy like the one we're in, that's not necessarily a given. In that spirit, following are three stocks with generous, sustainable dividends from companies that look like they're going to be around a while.

Each is consumer-facing, so the business model is easy to understand. Each is a Rule Maker in its market space that knows how to make, market, and distribute its products with machine-like efficiency. And each is a profit-making dynamo, producing low-priced goods that people around the world need to buy over and over.

Without further ado, then ...

1. Waste Management (NYSE: WM  )
You've no doubt seen the forest-green trucks of this $15 billion market-cap waste collection and disposal company plying the roads in your city or town many, many times. You've also no doubt heard them, at hours of the morning too painful to think about -- unless you're an investor, that is, in which case it ought to be music to your waking ears.

Rubbish collection is as much of a necessity for human civilization as water, sewage, and electricity. Just conjure up images of any of the big-city garbage strikes that have made the news in past years, and it will be clear why a well-run company like Waste Management isn't going anywhere, anytime soon. By the numbers:

  • I like to see dividend yields of around 3% -- an arbitrary threshold, but one I think separates the wheat from the chaff. Waste Management's 4.1% tops this nicely. Republic Services (NYSE: RSG  ) , with a comparably sized peer with a market cap of $10 billion, also pays a nice dividend of 3.2%, but it's hard to pass up on Waste Management's higher payout as a dividend investment.
  • I like to see dividend payout ratios of 50% or less -- the lower the percentage, the more sustainable. At 65%, Waste Management is higher than we like, but not grossly so.
  • And as of its most recent earnings report, the company's gross margin, an indicator of brand strength and pricing power, is 35.8% -- not killer, but comparable to the rest of the industry. The top and bottom lines, however, grew significantly, at a superb 8.9% and 11.5% YOY, respectively.

The stock trades for an affordable $32, so you can load up on shares, with a reasonable P/E of 16. Waste Management provides a service we humans can't get by without, has exceptional top and bottom lines, and pays a generous dividend. Applaud those green trucks the next time they wake you up -- if you buy some shares, that is.

2. Southern (NYSE: SO  )
Staying with the theme of "the necessities of life," let's move on to electricity. Southern, one of the largest, best-managed electric utilities in the country, dominates the power business across the southeastern United States. The company is 100 years old, has 4.4 million customers, and has more than 42,000 megawatts of generating capacity.

One of the great things about utilities is that unless they have to spend to build new generating capacity, they otherwise send power down the lines, collecting cash from customers, and pay it back out to investors in the form of dividends. Southern is no exception. By the numbers:

  • At 4.2%, Southern easily makes the grade on my 3% dividend target.
  • The company's payout ratio is a 77%, which is well above the 50% cutoff point but actually quite normal for an electric utility.
  • The company's gross margin 12 months trailing, or TTM, is 37.6%. Again, not killer, but in line with the rest of the industry.
  • Finally, Southern's top line grew by 2% YOY -- nothing to write home about, but the bottom line ballooned by 12% YOY. Nicely done, Southern.

The stock trades for an affordable $45 at a reasonable P/E of 18. With its great bottom line, healthy dividend, and a dominant position in its geographical and industrial sector, Southern is positioned to deliver both power and investor profit for a long time to come.

3. Diageo (NYSE: DEO  )
If you drink alcohol of just about any variety, it's hard to get away from Diageo's brand reach. The company is home to Johnnie Walker, Tanqueray, Smirnoff, Guinness, and more. Diageo owns nearly one-fifth of the world's top 100 liquor brands and sells its products in more than 180 countries.

People around the world seem to enjoy a drink now and then, or more, and keep coming back to Diageo. By the numbers:

  • The stock's trailing dividend yield weighs in right at the 3% target.
  • The payout ratio is 51%, just a hair over my upper limit of 50%.
  • The gross margin TTM is a whopping 59.6%, versus 56.5% for peer Anheuser-Busch InBev (NYSE: BUD  ) .
  • Finally, Diageo's quarterly earnings growth YOY is very healthy 15.2%. Now that's something to raise a glass to.

The stock itself trades for $87, still in the affordable range, with a reasonable P/E of 18. Diageo is the king of its market space, with a great gross margin, strong top and bottom lines, and a very generous, sustainable dividend. Cheers, Diageo.

Inescapably Foolish bottom line
There you are: three killer companies with stocks that offer some of the market's best, most sustainable dividends. For the scoop on 11 more great dividend stocks from rock-solid companies, read this brand-new Motley Fool special free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." Get your free copy while it's still available.

Fool contributor John Grgurich believes in keeping his enemies close and his Johnnie Walker closer, but he owns no shares of any of the companies mentioned in this column. The Motley Fool, however, owns shares of Diageo and Waste Management. Motley Fool newsletter services have recommended buying shares of Waste Management, Republic Services, Southern, and Diageo, as well as writing a covered strangle position in Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 scintillating disclosure policy.


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  • Report this Comment On January 07, 2012, at 9:25 PM, GETRICHSLOW2 wrote:

    I like Waste Mngt and currently own some that I plan to hold on to long term but I would not be a buyer at todays conditions. The intangible asset level concerns me and they also have a negative tangible book value.

    I also own and like Sothern Co. but if I was in the market for a utility today there are much better options out there. A few that come to mind are EXC, NEE, and PEG. Low p/e's, nice dividends, and low payout ratios. Excelon is at 5%.

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