A generous dividend is all well and good, so long as the company sticks around long enough to keep paying it out, but in this economy that's not necessarily a given. In that spirit of realism let's look at three stocks with strong yields from companies that look like they're going to be around awhile.
Each of our three companies will be consumer-facing, so the business models will be easy to understand. Each will be a king of its market space that can make, market, and distribute its products with machine-like efficiency. And each will be a profit-making dynamo, producing goods that people around the world need to buy over and over.
Without further ado:
1. McDonald's (NYSE: MCD )
Growing up, whenever I passed a McDonald's restaurant, I'd eagerly look to see how many millions or billions had been served. The company doesn't do that anymore, maybe because the number would seem absurd; it's probably surpassed the population of the planet by now, which helps make my point. After 71 years, this not-so-humble American hamburger joint is still serving countless Big Macs, shakes, and fries to people around the world. By the numbers:
- We like to see dividend yields of around 3%. It's an arbitrary threshold, but one we feel separates the wheat from the chaff. At 2.8%, McDonald's comes in just shy of our goal. Yum! Brands (NYSE: YUM ) , McDonald's most powerful global rival, pays a completely uninspiring 1.7%.
- We like to see dividend payout ratios of 50% or less; the lower the percentage, the more sustainable it is. At 48%, McDonald's is right in the comfort zone. Yum! may come in at 38% for this metric, but McDonald's 48% is as solid as you need.
- Gross margin is an indicator of brand strength and pricing power. At 39.6% over the past 12 months, McDonald's beats the industry average by about 9%, and easily beats Yum!'s 26.5%.
- Finally, quarterly revenue for the golden arches was a very healthy 9.8% year-over-year, though not as healthy as Yum!'s 15.4%. And while quarterly earnings growth for McDonald's was a very healthy 10.8% YOY, Yum!'s was positively explosive at 29.9%.
Some of Yum!'s numbers may trounce McDonald's, but remember that Yum! is a younger brand, and much more in its big-growth spurt. The fact is, McDonald's numbers are solid, and its P/E of 19 is a lot more attractive than Yum!'s 23. Combine this with McDonald's 2.8% yield, and there's really no comparison between the two.
2. Intel (Nasdaq: INTC )
Even though the company is no longer the tech darling it used to be, it's still the dominant semiconductor manufacturer for the computer industry. It's practically a monopoly. And though the company is playing catch-up in the tablet and smartphone chip arena, there are still plenty of laptop and desktop computers being made, making Intel a tech powerhouse that isn't in danger of going out of business anytime soon. To the contrary:
- We said we like to see yields of around 3%. Intel's 3.2% nicely clears the fence. Peer Advanced Micro Devices (NYSE: AMD ) doesn't even pay a dividend.
- Intel's payout ratio is a gentle 33%. No complaints there.
- Intel's gross margin is a beautiful 62.5% over the trailing 12 months, crushing the industry average of 42.2%, as well as AMD's 44.8%.
- Quarterly revenue for Intel grew at a big 21.2% YOY versus AMD's 2.5%, with quarterly earnings for Intel up a solid 5.7%.
Intel's stock trades for $26 per share with a P/E of 11, similar to AMD's P/E, but that's where any similarities between the two companies end. Intel is a still healthy, growing tech giant that pays a great, sustainable dividend. It's good to be the king, especially for investors.
3. McCormick (NYSE: MKC )
Yes, we're talking about the spice company here, but it's more than just the racks upon racks of bottled herbs and spices. The 123-year-old company also makes seasoning mixes for many different styles of cooking, extracts and food colorings, grill seasonings, and seafood seasonings. McCormick is ubiquitous in kitchens throughout America, which is clearly shown in the company's numbers:
- McCormick pays a dividend of 2.5%, under our goal of 3%, but still generous.
- The company's payout ratio is a very sustainable 41%.
- The gross margin is a healthy 41.2% TTM, handily beating the industry average of 31.2%.
- Quarterly revenue grew a more-than-healthy 13.4% YOY, while quarterly earnings YOY were down just a hair at -1.4%.
The stock itself trades for $52 per share with a P/E of 18. Commodity prices are up around the world, which could explain the declining earnings, but the company is iconic for cooks and is financially solid otherwise. McCormick rules its niche, and isn't going away anytime soon.
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