If you invest for income, then dividend-paying stocks are likely to be a core component of your investment approach. And your biggest concern is likely to be buying a stock that ends up cutting its dividend, thus reducing the income your portfolio generates. There are no guarantees in life or investing, of course, but Nucor Corporation (NUE 0.31%), Waste Management, Inc. (WM 0.97%), and A. O. Smith Corporation (AOS -0.71%) have rock-solid dividends. If you are looking for some dividend safety, these three stocks have you covered.
1. The steel giant
Nucor is one of the largest and most diversified steel companies in the United States. It is widely regarded as one of the best run as well. Its business is built on electric arc furnaces, which are generally more efficient than blast furnaces, an older technology, and they make heavy use of scrap steel, which can help to keep costs down. The company bled red ink in 2009, at the tail end of the deep 2007 to 2009 recession, but has reported positive earnings every year since despite a long industry downturn that only began to trend higher in 2016.
Image source: Getty Images.
More to the point for dividend investors, however, Nucor has increased its dividend every single year for 45 consecutive years despite the recession and a long industry downturn. The company's payout ratio was a healthy 45% in 2017 and is just about 30% over the trailing 12 months. Nucor has a conservative business model that stresses low levels of debt and constant investment for the future. This is what helps it exit downturns in better shape than it entered them and allows the steel company to keep upping the dividend all along the way.
To be fair, the stock isn't exactly cheap today (though it remains a great steel company if you are looking for one), with a large price advance since 2016 pushing the yield down to 2.4%. But the cyclical nature of the steel business suggests that patient investors who keep tabs on Nucor could get a decent yield from a company with a rock-solid dividend if they wait for the next industry downturn to hit.
2. Dirty business
Waste Management is one of the largest trash haulers in the United States, owning a network of garbage routes, processing facilities, and landfills that would be hard, if not impossible, to replicate. The business is based on long-term contracts to supply a service that is basically a modern necessity. Economic ups and downs can have an impact on the company, but the need for trash disposal isn't going away any time soon.
That said, the stock currently yields around 2.1%, and the dividend has been increased annually for 15 consecutive years. The payout ratio in 2017 was a reasonable 54%, with the trailing 12-month figure at roughly 36%. The company's debt, meanwhile, makes up around 60% of the capital structure. That's on the high side but not unreasonable based on the capital-intensive nature of its business. The company's financial debt-to-EBITDA ratio is a fairly reasonable 2.3 times, and its earnings exceed its interest costs by more than seven times. There's little reason to be worried about the dividend today.
WM Financial Debt to EBITDA (TTM) data by YCharts.
The business, meanwhile, is doing particularly well right now, with second-quarter earnings coming in above analyst expectations. The company also upped its full-year guidance. And management intends to keep rewarding shareholders for sticking around via business growth (with bolt-on acquisitions a core focus), stock buybacks, and regular dividend hikes. The yield might not be huge, but Waste Management is the type of dividend stock that investors can own and sleep well at night knowing their dividend checks will keep arriving each and every quarter.
3. An opportunity for long-term investors
Water heater maker A. O. Smith's North American business is the core of the company, accounting for around two-thirds of revenues. This is a slow-growth operation, with replacement purchases and new construction driving management's expectation for 4% annual revenue growth over time. The rest of the business, however, is in fast-growing markets like China and India, where annual revenue growth is expected to be around 14%. The pairing of a slow but solid core business with a swiftly expanding emerging-market business has driven annualized earnings growth of 26% a year since 2010.
The dividend yield is currently 1.3%, which seems pretty low. But that's actually the highest the yield has been in about five years. The payout ratio, meanwhile, is a modest 33% over the trailing 12 months and has been below 30% in all but one full calendar year over the past decade. Long-term debt is just 15% or so of the capital structure, a very modest level. So there's little reason to fear a dividend cut here.
AOS Dividend Yield (TTM) data by YCharts.
But there are two more factors to examine. First, a slowdown in China, the company's largest foreign market, has left some investors worried that growth is going to decline. Management thinks those concerns are overblown. And India is a relatively new market for A. O. Smith that should pick up any slack in China, anyway. So the sell-off that's transpired and pushed the yield to a five-year high could be a buying opportunity for those with a long-term bent.
Second, the relatively low yield is offset by the company's massive dividend growth -- an annualized 17% a year over the past decade. The dividend, meanwhile, has been increased for 25 consecutive years.
Basically, A. O. Smith could add a little income growth to a portfolio focused more on high yield. That growth, meanwhile, would be from a company with a solid dividend and impressive dividend-paying history.
Safety first
When you invest for income, you generally have to juggle yield, dividend safety, and dividend growth. While you'll give up a little of the yield side with Nucor, Waste Management, and A. O. Smith, they make up for it on the dividend-safety and growth sides. If you are seeking safe dividends to add to your portfolio, this trio should be on your short list today.
