A safe and high-yielding dividend stock can make for a great investment to hang on to for years. It can not only boost your overall returns, but can also give you some money to spend, which can help you resist the urge to sell an investment just to free up some cash.
The S&P 500's dividend yield is less than 1.4% today. Merck & Co. (MRK -0.11%), Royal Bank of Canada (RY 0.12%), and Intel (INTC -1.79%) all pay more than double that amount. In addition to their high payouts, their underlying business are also sound and incredibly profitable.
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1. Merck
Merck's dividend yield of 3.2% is well above average, and can generate some meaningful income for dividend investors. And with a payout ratio that's at roughly 50% of net income, investors don't need to worry about the safety of this dividend. Plus, it has a top-selling drug in Keytruda, which helps patients fight cancer; in 2021 the drug generated $17.2 billion in sales for the company, up 20% from the previous year.
While the bears will try to dwell on an eventual loss in exclusivity for the drug, that won't come until 2028. This gives the company plenty of time to diversify its portfolio. And Merck has already begun doing that through an $11.5 billion acquisition of Acceleron Pharma, which focuses on rare diseases.
There's no crystal ball to tell investors how Merck will do 10 years from now. But with a strong business model that enables it to generate net margins of 27% and a modest payout ratio that's about half of its income, this is not a dividend stock I would worry about right now. The company's general stability is likely a key reason investors have been flocking to it this year as they look for safety amid soaring inflation. Year-to-date, shares of Merck are up 13%, while the S&P 500 has fallen by 8%.
2. Royal Bank of Canada
Bank stocks are normally safe havens for dividend investors, and ones that pay high yields can be especially attractive given that stability. Royal Bank of Canada (RBC) currently yields 3.5%, which makes it one of the higher-paying bank stocks out there; Wells Fargo & Company pays 2% while JPMorgan Chase is higher but still modest at 3.2%. That's even with Royal Bank's payout ratio at just 42%, well within its historical range of 40% to 50%, potentially suggesting that there's room there for some rate hikes in the near future.
RBC is Canada's largest bank and undoubtedly one of the safest investments in the country. It's also the most highly valued company on the Toronto Stock Exchange with a market cap of more than $155 billion. The bank has steadily grown its revenue over the years from CA$37 billion in fiscal 2017 (its year ends in October) to more than CA$45.6 billion in fiscal 2021. Its consistently high profit margins of around 25% or better also ensure that you aren't going to be taking much risk by investing in this top dividend stock.
3. Intel
Rounding out this list of safe income stocks is Intel. At a yield of 3.1%, its payout holds its own with some of the better dividend stocks on the markets today. And like the two stocks listed above, it also generates strong margins. In the past fours years, the lowest that the tech company's profit margin has been was 25% of revenue.
Its payout ratio of 28% is the lowest on this list, which give the company plenty of room to both pay a dividend and also pursue an aggressive growth strategy and expand its capacity to make computer chips. Earlier this year, Intel announced a $5.4 billion acquisition of Tower Semiconductor, funded entirely through cash, in another great sign that the business is self-sufficient and doesn't need to rely on large stock offerings to grow its operations.
Given the chip shortage in the world, the investments that Intel is making now to expand its capacity could pay off years from now (for both dividend and growth investors), and that's why it could make for an incredibly promising stock to hold for the long haul.
