3 Big, Safe Dividend Stocks for the Beginning Investor

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, because understanding how a company makes money will significantly reduce your overall investing risk.

In that spirit, today we'll look at three companies with straightforward business models, strong dividends, and a knack for longevity. Because what good is a great dividend if the company's not going to be around long enough to pay it out?

Without further ado, then, here are three big, safe dividend stocks for the beginning investor, along with the reasons for my personal favorite at the end:

1. Boeing (NYSE: BA  )
727. 737. 747. 787. At first glance, they're just numbers, but upon reflection they're so much more. You've heard them uttered or read about them your whole life. They represent what Boeing is all about: airliners. Boeing is the most successful company in the history of aviation, and indeed is the very essence of American aviation. This is a company that has endured its share of economic ups and downs, just like any other big company that's been around for nearly 100 years, but is still at the top of its game.

From a dividend investor's perspective:

  • I normally look for dividend yields of around 3% -- an arbitrary threshold, but one I feel separates the wheat from the chaff. Boeing pays 2.5% -- under our threshold, but close enough to enjoy consideration as one of our dividend stocks, especially given what a rock-solid industrial giant it is.
  • I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable it is. At 30%, Boeing's falls well below our 50% mark, which argues well for its longevity.

Boeing's five-year average dividend yield is 2.7%, which bodes well for the longevity of the current 2.5%. But most critically, the orders for aircraft just keep coming, with airlines around the world placing orders in record numbers. On Sept. 6, the company reached a milestone: order No. 500 for its next-generation 737 aircraft, the workhorse of the fleet in airlines everywhere.

2. Johnson & Johnson (NYSE: JNJ  )
Johnson's Baby Shampoo. Tylenol. Band-Aid. Listerine. Brands that are burned into your memory from childhood, and likely still have a significant presence in your life. J&J has been around since 1886, and just like Boeing, has seen its share of ups and downs, including an embarrassing string of product recalls lately. But the company has a new CEO, Alex Gorsky, who is tasked with turning the company around with a strategy focusing on the rehabilitation of the consumer-products division. Given J&J's stable of iconic brands, it's a good one.

From a dividend investor's perspective:

  • I said I look for a 3% yield on our dividend stocks. At 3.6%, J&J easily makes the grade, as does, to its credit, rival Pfizer (NYSE: PFE  ) , which pays out an identical 3.6%.
  • At 74%, J&J's payout ratio is steeper than I like, but not frighteningly so. Pfizer comes in at a better, but not game-changing, 62% on this metric.

J&J has a five-year average dividend yield of 3.1%, which argues fairly well for the sustainability of the current 3.6%. While having a rough go of it right now, this company will be rehabilitated. In the end, J&J has too much brand strength and too much money in the bank -- $16.9 billion -- to go away anytime soon. And its wide-ranging consumer and medical-professional product lines make it a safer bet in the long run than strictly pharmaceutical-focused Pfizer.

3. Wells Fargo (NYSE: WFC  )
It's not often that a bank, especially a big one, can be recommended as stock for the beginning investor, but Wells Fargo is a happy exception. It's the fourth-largest bank in the country by assets with more than $1.3 trillion, giving it plenty of potential to have gotten mixed up in all kinds of shenanigans in the run-up to the financial crisis (like so many of its peers), but instead having come out the other side very clean. The superbank can brilliantly chock this victory up to having kept its focus on traditional banking, which it still does, and which it makes a killing at.

From a dividend investor's perspective:

  • At 2.6%, Wells Fargo comes in shy of our 3% benchmark, but not by much. And the bank is such a powerhouse business, it's worth having a look at despite the 0.04% dividend shortfall. Rival JPMorgan Chase (NYSE: JPM  ) comes in at our benchmark 3% on this metric, but more later on why that still doesn't necessarily make it a good beginner's investment.
  • At 23%, Wells Fargo's payout ratio is pleasingly low, and therefore very sustainable. At 24%, JPMorgan's is much the same.

Wells Fargo has a five-year average dividend yield of 2.4%, boding well for the future prospects of the current 2.6%. Even though JPMorgan offers a better yield, it relies more on investment-banking derring-do to make its money, and as it's markedly bigger ($2.3 trillion in assets) than Wells Fargo, it's far more difficult to manage. The recent London Whale trading debacle should be evidence enough of that. No, JPMorgan is no place for beginners, and maybe not even advanced investors.

Who's better, who's best?
Shocking as it may at first seem, I'm going with Boeing. It's such a solid, storied organization. And even through the ups and downs of countless economic cycles and airline business cycles (which can be particularly cruel and vicious), almost every aircraft the company has ever made has met with some, if not lasting, success. Boeing never lets up, and despite some trouble with production delays, it has never had its image seriously tarnished with scandal. And the way orders keep coming in, I think Boeing is going to be around for a long time, and hence keep paying its healthy dividend for a long time.

So there you have it: three great companies with business models any investor can get his or her 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 brand-new free Motley Fool special report: "3 Dow Stocks Dividend Investors Need." The title says it all. Get your copy while the stocks are hot by simply clicking here now.

Fool contributor John Grgurich would love to stop and chat, but is too engrossed in the bond-yield section of Financial Times. For the record, John owns no shares in any of the companies mentioned in this column.

The Motley Fool owns shares of Johnson & Johnson and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson. The Motley Fool has a moving disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (5)

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 September 14, 2012, at 4:05 PM, thenoffya wrote:

    I like how you set certain thresholds for the different dividend criteria, and then ignore them.

  • Report this Comment On September 14, 2012, at 7:26 PM, XMFGrgurich wrote:

    The dividend criteria are guidelines, and shouldn't be followed like dogma. Dogma gets people into trouble. Check out the situation in the Middle East right now if you're not completely sure of that.

    Cheers, my Foolish friend.

    John

  • Report this Comment On September 15, 2012, at 3:54 PM, chadscards1274 wrote:

    "At 2.6%, Wells Fargo comes in shy of our 3% benchmark, but not by much. And the bank is such a powerhouse business, it's worth having a look at despite the 0.04% dividend shortfall." - I think you meant 0.40% shortfall not 0.04%. Aside from that good article.

  • Report this Comment On September 15, 2012, at 4:22 PM, Ewishal wrote:

    Just getting started. 3 big dividend stocks? Anybody considering special dividend distributions in light of fiscal cliff thinking?

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