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Whether you're new to investing or have been at it for a lifetime, you need to understand the business models of the companies you invest in. Understanding exactly how a company makes money greatly reduces your overall investing risk.
In that spirit, today I'm going to look at three companies with straightforward business models and strong dividends, focusing on companies that have been around awhile and look like they're going to stay around. Because what good is a great dividend if the company's not going to be there to pay it out?
Without further ado, then, here are three, big safe dividend stocks for the beginning investor, along with my personal favorite reasoned-out at the end:
1. Wells Fargo (NYSE: WFC )
Of all the banks that made it through the financial crisis intact, Wells Fargo came out smelling closest to a rose, wisely shying away from many of the financial shenanigans that got Wall Street into such trouble. For being such a big, modern bank, Wells Fargo behaves delightfully like an old -fashioned one. As such, it's profitable and stable, a rare combination in banking today.
Now let's have a look at some important numbers for the lending giant:
- I normally like to see dividend yields of around 3%: an arbitrary threshold, but one I feel separates the wheat from the chaff. Wells Fargo pays a yield of 2.7%, short of our mark but not by enough to make me reject it. Rival superbank Bank of America (NYSE: BAC ) , by contrast, currently pays a dividend of only 0.5%.
- I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable. At 20%, Wells Fargo's is very sustainable and has plenty of room for growth.
Wells Fargo's five-year average dividend yield is 2.4% -- not too far off from what the bank is paying now -- which is encouraging. And in the recent sweeping credit-rating downgrade of the banking sector, Wells Fargo avoided a downgrade as America's five other largest banks got tagged with a lower rating.
2. United Parcel Service (NYSE: UPS )
For all the cachet FedEx (NYSE: FDX ) has garnered since it came onto the package-delivery scene in 1971, UPS is still the larger carrier of the two by market share and still pulls in more revenue. FedEx made its biggest cultural and commercial splash with the introduction of its overnight delivery service, a real breakthrough for industry from a consumer perspective, but UPS got into that space quickly enough after and has made the most of it.
Now, a few important metrics for the dutiful and dashing Men in Brown:
- At 2.9%, UPS is too close to my 3% benchmark for me to ignore. Paying a dividend of 0.6%, FedEx is all too easy to ignore.
- At 54%, UPS' payout ratio is right in the pocket. FedEx's 8% payout ratio is very sustainable, but at only 0.6%, does it really matter?
- Gross margin is an indicator of brand strength -- an important component of pricing power -- and production efficiencies, both of which directly affect the bottom line. Relative gross margin gives you a rough idea of how dominant the company is in its sector and how strong of a performer it is relative to its peers.
I didn't talk about gross margin with banks, because it really doesn't apply to that sector. But UPS comes in at 23% over the trailing 12 months for this important metric, well ahead of the industry average of 16%, and just slightly below FedEx's gross margin of 25% over the same time period. As such, both companies do a good job at keeping their production costs in line.
With a five-year average dividend yield of 2.8%, UPS' 2.9% yield isn't just a fluke. The company's also not resting on its laurels; UPS just announced a buyout offer to TNT Express -- a big, worldwide freight carrier that would immediately give UPS a leg up in Europe, and down the road, it'd give UPS better access to emerging markets.
3. Unilever (NYSE: UL )
Unilever is a consumer-goods company in the tradition of Procter & Gamble, but with more of a European twist. This makes some sense, as the company is based in the U.K. Regardless, you'll undoubtedly recognize many of the company's brands, like Hellmann's, Lipton, Slim Fast, Dove, Pond's, and Vaseline. Let's have a look at some important numbers for Unilever:
- The company nicely surpasses my dividend benchmark of 3%, coming in at a hearty 3.9%.
- At 65%, Unilever's payout ratio is a bit on the high side, but not excessively so.
- Finally, the company's gross margin of 40% nicely beats the industry average of 25%.
Consumer-goods companies like Unilever typically manage to touch everyone's life in one way or another, which is one reason they're usually such strong, stable investments. The company's website touts that 160 million people every day "choose" a Unilever product. Whether the company means 160 million people buy a product, or just use it is irrelevant. That's just a lot of product usage, plain and simple.
Who's better, who's best?
I'm going to go with Unilever here, and not just because the consumer-goods giant's dividend yield of 3.9% is the highest of the three. As 2008 demonstrated, banking can be a volatile industry, and drastic change can come seemingly out of nowhere, maybe even for a strong, stable bank like Wells Fargo.
UPS is dominant in its space, and package delivery is vital but not as vital or as dominant in people's lives as consumer goods are. Day-to-day items like our particular brands of soap, toothpaste, and skin- and hair-care products are some of the last things to go when money gets tight, which it is in most places in the world today. And let's be honest, the 3.9% dividend kills and is sustainable.
And there you have it: three great companies with business models any investor can get their head around, and stocks that offer some of the market's best, most sustainable dividends. If today's column has left you wanting more, check out this free Motley Fool special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." The title says it all. Get your copy while the stocks are hot by simply clicking here now.