It doesn't matter if you're new to investing or have been doing it for a lifetime -- you need to understand the business models of the companies you invest in. Understanding how a company makes money greatly reduces your overall investing risk.
In that spirit, today we're going to look at three companies with great dividends and easy-to-understand business models, focusing on businesses that have been around for a while and look as if 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:
1. General Electric (NYSE: GE )
GE is what's known as a conglomerate, i.e., it has many diversified lines of business. GE's lines of business include aviation, health care, energy, home appliances, and finance. Diversification like this can keep a company afloat and profitable even when certain, single lines of business aren't performing. This strategy has served GE well. The company was founded in 1892, and though it's seen its shares of ups and downs, it's still going strong. By the numbers:
- We like to see dividend yields of around 3%: an arbitrary threshold, but one we think separates the wheat from the chaff. At 3.4%, GE easily makes the grade and handily beats the yield of longtime rival Siemens AG (NYSE: SI ) , which comes in at 2.7%.
- We like to see dividend-payout ratios of 50% or less: The lower the percentage, the more sustainable it is. At 50%, GE's is right in the pocket. Siemen's payout ratio of 32% is even better, but GE's 50% is more than good enough.
- Gross margin is an indicator of brand strength, pricing power, and manufacturing efficiencies -- factors that affect the bottom line. At 37.91% over the trailing 12 months, GE has a solid edge against Siemens' 29.21% TTM.
GE trades for $20 per share, and the price-to-earnings ratio of 16 tells you the price is fair. GE makes a lot of money doing a lot of different things, but most of them are straightforward and easy to get your head around. And after 120 years in business, GE isn't going anywhere, anytime soon.
2. H.J. Heinz (NYSE: HNZ )
There's no mystery to how Heinz makes money. This 143-year-old classic titan of corporate America makes and sells food that you and I and people around the world eat every day. The company's key U.S. brands include the entire range of Heinz products, most famously Heinz Ketchup and Heinz Baked Beans, as well as Ore-Ida, Classico, Bagel Bites, and Smart Ones. By the numbers:
- We said we like to see yields of around 3%. Heinz's 3.6% nicely clears the fence, beating out peer Campbell Soup's (NYSE: CPB ) 3.5%.
- Heinz's payout ratio is 63%, higher than we'd like, but not dangerously so. At 50%, Campbell comes in right on the money for this metric.
- Heinz's TTM gross margin is a healthy 35.92% but is slightly edged out by Campbell's 39.46%.
Campbell edges out Heinz in two of our metrics, but Heinz does offer the best yield and is solid enough otherwise. Heinz trades for $52 per share, and the price-to-earnings ratio of 17 tells you that the price is a fair one. Anything can happen in the business world, and longevity itself is no guarantee of the future, but Heinz has been getting it right for a long time, looks healthy right now, and offers an eminently simple business model for investors.
3. Pearson (NYSE: PSO )
It's possible you've never heard of Pearson, but you've almost certainly encountered its products. The publishing company is best known in the financial world for the Financial Times. Pearson is also a giant in the education publishing field. And anyone who reads fiction or non-fiction has definitely read something on the Penguin imprint or on one of Pearson's many other imprints, which include Putnam, Viking, Dorling Kindersley, and Berkley.
Pearson makes things that people read. What in the world is easier to understand than that? By the numbers:
- Pearson pays a beautiful dividend of 3.5% (based on its dividend schedule last year).
- The company's payout ratio is an extraordinarily sustainable 33%.
- The company's TTM gross margin is a solid 55.24%, edging out the industry average of 54.34%.
The stock itself trades for $19 per share with a more-than-reasonable P/E of 10. Another great thing about Pearson is its commitment to digital. Across all of its lines of business, the British publisher is ahead of the curve when it comes to offering and charging for its digital content. In a world of diminishing print products, Pearson is company that won't get left behind and won't leave its investors behind, either.
9 more rock-solid dividend stocks
There you are: three great companies with business models any investor can understand, 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.