The Stocks You Need in a Shaky Market

Great news for dividend investors! America's companies are sitting on record piles of cash, and they're coming under pressure to return it to shareholders. Investors are demanding -- and sometimes receiving – higher payouts from America's wealthiest companies.

Like the rest of the U.S., corporate America has been stockpiling the green stuff since the 2008 financial crisis. The amount of cash, cash equivalents, and marketable securities soared to $2.77 trillion -- an increase of 63% since 2008, according to Bloomberg. With cash in the bank earning almost nothing and limited growth opportunities, these companies are being called on to put that money back in shareholders' hands.

Increasing payouts should help buoy shares, and that makes dividend stocks the place to be, even (or especially) in a shaky market. As I've shown elsewhere, dividend stocks tend to outperform over time but particularly in weak markets. Below I'll give you the chance to download a special free report detailing tried-and-true dividend payers that you'll want to have in your portfolio.

Cash at an all-time high
Some of the megacaps are absolutely chock-full of cash, as you can see in the table below.

Company

Cash and Short-Term Investments

As a Percent of Market Cap

Apple (Nasdaq: AAPL  )

$28.4 billion

8.2%

Microsoft (Nasdaq: MSFT  )

$51.4 billion

24.0%

Google (Nasdaq: GOOG  )

$39.1 billion

24.1%

Source: S&P Capital IQ.

Apple's total looks smaller than its tech brethren, but it doesn't include the $48 billion the company carries as long-term investments. And you'd have to write Microsoft's figure up by the nearly $11 billion in its long-term investments, too. But these might not be the best stocks to buy if you're counting on a dividend payday.

First, of these three, only Microsoft currently pays a dividend, a solid 3.2%. Apple and Google don't have a history of payouts, and even Microsoft's background as a dividend stock is less than a decade old. Moreover, in the fast-growing tech world, a company's decision to distribute cash to shareholders is a tacit admission that a business can't grow like it used to. And the market hates tech stocks that can't grow.

So it's probably not a good idea to hold your breath and wait for cash-rich companies to get "dividend religion," if they don't already have a pedigree of rewarding shareholders. But there are plenty of companies generating oodles of cash that do have a shareholder-friendly background of payouts.

As many investors note, with lackluster capital gains, it becomes ever more important to have dividends in order to generate a meaningful total return. With bond yields at historic lows, investors are migrating to dividend payers.

Three for the money
Each of the companies below has billions in cash and offers a great dividend play for investors who crave stable and rising payouts with the safety of consistent businesses.

Company

Yield

FCF Payout Ratio

Paying since...

5-Year Dividend Growth Rate

McDonald's (NYSE: MCD  )

3.2%

56.0%

1976

28.9%

Philip Morris International (NYSE: PM  )

4.9%

47.0%

2008

77.2%*

National Grid (NYSE: NGG  )

5.8%

45.0%

1996

6.9%

Source: S&P Capital IQ. *Since 2008.

McDonald's is performing exceptionally well in the U.S., and the company has great opportunities abroad, in the form of China and India among many others. For example, in China, the Golden Arches has just one store for every 650,000 citizens, compared with the U.S. where a store supports every 22,000. That's a huge prospect for growth!

What's more, the company has proven to be shareholder-friendly, with the promise to return all free cash flow to shareholders, either as dividends or share buybacks. I've called McDonald's the dividend play for a lifetime, and I stand by that statement.

Like its former parent, Altria (NYSE: MO  ) , Philip Morris pumps out an almost unbelievable amount of cash from its business -- $10.5 billion – and requires less than $1 billion in capital expenditures, making this company a true cash machine. Operating margins are consistently better than 40%, a level that's unheard of outside of pharma and software companies. And all that cash is going right back into shareholders' pockets.

Over the last four quarters, Philip Morris bought back $5.1 billion of its own stock and paid out $4.5 billion in dividends -- returning all its operating cash flow to shareholder-owners. While the company hasn't been independent long enough to sport a lengthy dividend history, it does have the pedigree of Altria, one of the biggest dividend success stories in history. Plus, the company just announced a 20% bump to the dividend. All that gives me confidence in this stock.

National Grid also is no slouch when it comes to dividends. While it doesn't sport the growth gusto that the first two names do, it's the safe-and-steady player that keeps on winning. This utility provides power and gas transmission services to the U.K. and U.S., getting paid when resources move through its infrastructure. So this stock operates like a regulated toll road, and its hard assets offer safety to investors, too. Management has promised 8% dividend growth through 2012, meaning this utility will continue to prove useful to income investors like us.

Foolish bottom line
So here are three great stock ideas if you're looking for solid businesses that pump out the dividends. If you're interested in more high-yield dividend stocks, then download a free report from Motley Fool expert analysts called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this report, and today, I invite you to download it at no cost to you. To get instant access to the names of these high yielders, simply click here -- it's free.

Jim Royal, Ph.D., owns shares of Microsoft, McDonald's, National Grid, and Philip Morris. The Motley Fool owns shares of Google, Apple, Altria, Microsoft, and Philip Morris. Motley Fool newsletter services have recommended buying shares of Apple, Google, National Grid, Microsoft, McDonald's, and Philip Morris. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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 disclosure policy.


Read/Post Comments (3) | Recommend This Article (26)

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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 October 08, 2011, at 5:21 PM, terracomm wrote:

    calling it now:

    microsoft cash buyout of sprint.

    cheap and a great market maker.

  • Report this Comment On October 08, 2011, at 6:20 PM, pryan37bb wrote:

    Doubt it. I think there are much better things Mr. Softie can do with that money. I'd sooner expect them to buy NFLX, so they can integrate it with their XBox Live and Windows Live systems, offer applications on PC's and Windows Phones, etc. I'd be disappointed to see them buy Sprint, being so much smaller than VZ and T. I think Sprint's gonna have problems going forward whether the T-Mobile deal goes through or not.

  • Report this Comment On October 10, 2011, at 4:32 PM, mikecart1 wrote:

    If Sprint gets bought out at $4+/share, I'm going to be sitting in heaven! :D

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