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 we're going to look at three companies with straightforward business models and strong dividends, focusing on companies that have been around a while 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. Piedmont Natural Gas (NYSE: PNY )
Piedmont is a supplier of natural gas to one million customers in North Carolina, South Carolina, and Tennessee. For consumers it's a relatively inexpensive, reliable method by which to heat their homes. For businesses, it's also a relatively inexpensive, reliable method by which to power their factories.
Either way you look at it, natural gas is a necessity for those who use it. Let's look at some important numbers for Piedmont:
- I normally like to see dividend yields of around 3% -- an arbitrary threshold, but one I feel separates the wheat from the chaff. Piedmont pays a healthy 3.7%.
- I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable. At 78%, Piedmont's dividend-payout ratio may look high, but not for a utility, which typically pays out the majority of its profits as dividends.
The company's five-year average dividend yield is 3.8%, which bodes well for the sustainability of the current 3.7%. And courtesy of the recent shale-gas boom, natural gas usage in the U.S. is only likely to increase.
2. Pearson (NYSE: PSO )
Pearson is a publisher, and is best known for the business daily Financial Times, the Penguin book-publishing imprint, and the company's wide-range of products and services in the education field. But before you let the word "publisher" scare you away as being representative of a holdover, dying relic of the past, know that Pearson is at the forefront of digital publishing. Recently, the company signed on with Apple's e-textbook initiative tech-innovator announced this past January. Pearson is a company that saw the digital transformation coming years ago and wasted no time in getting on board.
Now, a few important metrics for the progressive publisher:
- At a dividend yield of 4.7%, Pearson easily surpassed my 3% benchmark. Perennial rival-publisher McGraw-Hill (NYSE: MHP ) pays only 2.3%.
- At 35%, Pearson's payout ratio is very sustainable, as is McGraw-Hill's 33%.
Pearson has a five-year average dividend yield of 2.7%. It would be nice to see that a bit higher, but Pearson is, I think, really a company on the way up in all regards. One example: This past April, it announced a partnership with JJL Education to promote Pearson's English Language Proficiency Test in China, the emerging market of all emerging markets.
3. Microsoft (Nasdaq: MSFT )
Microsoft is not as cool or as hip as Apple (Nasdaq: AAPL ) , and everyone knows it. It never has been and it never will be. But who cares? As far as the computer age goes, Microsoft has been around forever and isn't going anywhere anytime soon. The company has its software-coding hands in a little too much of everything that touches our computer-driven world today, and that trend seems destined to continue.
Let's have a look at some important numbers for this tech stalwart.
The company pays a healthy dividend of 2.7%, shy of our benchmark, but only by a small margin. Apple announced a dividend earlier this year but has yet to start paying it.
At 26%, Microsoft has a very sustainable payout ratio.
Microsoft has a five-year average dividend yield of 2%. I'd prefer that figure be larger, but Microsoft is another one of those companies that, if not exactly rocketing skywards, is still moving in that general direction. The company is currently making a big push into smartphones with its Windows smartphone operating system, and it's even making a move into tablet computers.
Who's better, who's best?
Out of these three fine contenders, my money goes with Pearson. The company is taking a traditional model and adapting it beautifully for the modern age. The fact is, people are always going to read the news and read books. And students will always need to have textbooks. Whether they do it on-screen or on the printed page, Pearson is going to be there for them.
And 4.7% is a nice yield in a company that still has a lot of growth ahead of it. 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 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.