3 Big, Reliable Dividends Built on Business Models Even I Can Understand

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?

1. France Telecom-Orange (NYSE: FTE  )
France T is the French version of America's old Ma Bell, offering land-line telephone service, mobile-phone service, Internet service, VoIP, and cable TV to more than 223 million customers. It operates in 33 countries, including France, Spain, Poland, and the U.K., under the France T and Orange brands, and delivers essential communications services. As such, like Ma Bell did in its day, France T lives in the space somewhere between a telecom company and a utility. A good space to be in, from an investor standpoint.

  • I normally look for dividend yields of around 3%: an arbitrary threshold, but one I feel separates the wheat from the chaff. France T has no problem with this benchmark, as it currently pays a spectacular 12%. Euro-rival Vodafone (Nasdaq: VOD  ) is no slacker when it comes to yield either, paying a hearty 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 86%, France T's would be on the high side for a straight-out telecom company, but not for a utility. Again, with the company operating in that middle ground, it's a bit of a coin toss. So I'll say the payout ratio could stand to be a bit lower, but that it isn't alarmingly high. Vodafone's payout ratio is 94%. Now that's straight-out alarming.

France T's five-year average dividend yield is 5.9%. I'd like to see that higher; it would make me more confident that the current 12% is going to hang around for a while. But I do like that, in addition to its bustling-but-basic consumer business, it also provides platform services, like customer relationship management, messaging, hosting, cloud computing, and security solutions. France T does it all.

2. Mine Safety Appliances (NYSE: MSA  )
Mine Safety has been around since 1914, and is the undisputed world leader in the development and manufacture of mine-safety gear: hard hats, helmets, respirators, you name it. It's a simple business model, but one executed with near perfection by MSA, and one that's in no danger of going away: Coal still powers 50% of America's electrical grid.

  • I said I look for a 3% yield on dividend stocks. At 3%, MSA just makes it.
  • And at 45%, MSA's payout ratio is perfect.

MSA has a five-year average dividend yield of 3.1%, which argues for a potentially higher dividend in quarters to come. James Early, The Motley Fool's lead advisor on Income Investor, loves the fact that the company's top five managers have each been with the company for 29 years or more, and that insiders own more than 22% of its stock.
So do I. 

3. Chevron (NYSE: CVX  )
For those violently and intrinsically opposed to big oil, avert your gaze and skip to the bottom of the article. But for those who recognize it as a necessity, for the time being at least, please continue reading. Chevron is the country's second-largest oil company, with daily production of 2.8 million barrels of oil per day. And for what it's worth, for the socially conscious-minded out there (like myself), Chevron recognizes that climate change is real (something even many of the country's leading politicians deny) and has a set of guiding principles in place to begin addressing it from its end. 

  • At 3.6%, Chevron easily surpasses our 3% benchmark. Big-oil peer Exxon Mobil (NYSE: XOM  ) only manages 2.5% here.
  • At 25%, Chevron has a very sustainable payout ratio. The company is being very cautious with the money it throws around: a good sign. ExxonMobil also does very well on this metric, with a payout ratio of 23%.

Chevron's five-year average dividend yield of 3.1% argues fairly well for the continuation of the current 3.6%. The company also hasn't missed a dividend payment going back at least as far as 1997, and has raised it from $0.54 per share to $0.90 per share in that space of time. We like that kind of track record around here.

Vive la France!
Am I about to be uninterestingly obvious? Probably, but that 12% dividend France T is currently offering is just too juicy to pass up. With its vast customer base and vast array of services on offer, as well as a reasonable enough payout ratio, France T is hard to go wrong with right now, in my opinion. Ma Bell, being essentially a monopoly in its time, would have been hard to pass up as an investment, too.

Looking for more high-yielding dividend payers? Check out The Motley Fool's special free report outlining our nine top dependable dividend-paying stocks. Aptly enough, it's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost. Just click here to discover the winners we've picked.

Fool contributor John Grgurich owns no shares in any of the companies mentioned in this column. Follow John's dispatches from the bleeding edge of capitalism on Twitter, @TMFGrgurich.

The Motley Fool owns shares of France Telecom and ExxonMobil. Motley Fool newsletter services have recommended buying shares of Mine Safety Appliances, Chevron, France Telecom, and Vodafone Group. The Motley Fool has a gripping 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 (6) | 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 October 24, 2012, at 3:14 PM, ByrneShill wrote:

    THere's no fiscal agreement with france. The french government will retain 30% of that dividend. If you invested in a tax-sheltered account (IRA, Roth-IRA, etc) then you can kiss that money goodbye. In a regular account you can claim a foreign tax deduction, but otherwise, the yield goes from 12% to 8%. If you hold FT in an IRA account, the company paid taxes on corporate profits, you paid french taxes on dividend, and then you pay income taxes when you withdraw from the IRA. Helllllooooo triple taxation.

  • Report this Comment On October 25, 2012, at 9:54 AM, XMFGrgurich wrote:

    ByrneShill, I checked in with James Early, lead advisor on the Fool's Income Investor Newsletter, on your concern, and here's what he had to say:

    "This gentleman is partly correct. If you hold France T in an IRA, you've got no tax to use your IRS Form 1116 to offset. But the US does have a tax treaty with France, and you can get the withholding down to 15%, to match the US. So in other words, assuming you had foreign offsettable income, you'd just pay 15% dividend tax to France, and nothing to the US."

    So it can be done, but it can be a bit complicated. Thanks for the heads-up on this, ByrneSchill.

  • Report this Comment On October 25, 2012, at 9:57 AM, XMFGrgurich wrote:

    The other thought is, of course, even if you are only netting 8% off FTE, that's still a phenomenal yield from a solid company.

  • Report this Comment On October 26, 2012, at 5:46 PM, sheldonross wrote:

    FTE cut their dividend yesterday, so this article has pretty poor timing. The current yield works out to around 8% before taxes, not the stated 12.4%.

  • Report this Comment On October 27, 2012, at 11:29 AM, XMFGrgurich wrote:

    It's true:

    "The owner of the Orange brand, saying it’s coping with a more difficult environment than expected, will pay a dividend of at least 80 cents ($1.04) each for 2012 and 2013, as much as 41 percent lower than last year."

    http://www.bloomberg.com/news/2012-10-25/france-telecom-cuts...

    It's still a nice dividend, but obviously not as nice as it was.

  • Report this Comment On November 14, 2012, at 11:44 AM, thidmark wrote:

    "Chevron recognizes that climate change is real (something even many of the country's leading politicians deny) and has a set of guiding principles in place to begin addressing it from its end."

    Nobody knows what is causing this. I repeat, NOBODY knows what is causing this. Not you, not Chevron and not any of the "country's leading politicians."

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