If you're an experienced income investor, then you know not all dividend stocks are built the same. Some of them can reliably dish out dividends even in the worst of times. Others sometimes struggle to keep paying dividends, if they continue paying them at all.
These disparate outcomes prompt one critical but simple question: What makes safe dividend stocks safe? Here are the top three things the market's most dependable dividend stocks all have in common.
1. Their businesses are recession-resistant
There was a time when certain companies were downright recession-proof. Utility companies in the 1960s and '70s are a good example. Even the wildest of price swings and deepest of recessions didn't rattle power providers' operating costs. These days, though, many aspects of almost every business are sensitive to economic weakness and its causes (like inflation and soaring interest rates).
Nevertheless, several industries are still quite recession-resistant. Utilities is one of these industries. So are packaged foods. People have to eat, after all, even when times are tough. They may grumble about rising food costs, but they don't want to go hungry. That's one of the key reasons Hormel Foods (HRL 0.89%) has not only paid a quarterly dividend for decades, but has been able to raise its annual dividend payment for 57 consecutive years.
2. Their companies are adaptable
Some foods may be packaged differently than they used to be, and personal dining preferences have certainly evolved over time. The world, however, is still eating the same basic foods it's been eating for eons. That's why food companies rarely suffer from obsolescence.
The same can't be said for other sectors of the economy. Sometimes, a company is too deeply married to a particular product or process to survive the advent of new technologies. AOL and Blockbuster come to mind.
There are some dividend-paying, technology-specific businesses built to adapt to changes in the marketplace, though. Look at cable television giant Comcast (CMCSA 1.33%). The entire cable television industry is bumping into the cord-cutting headwind. But, Comcast isn't just a cable TV outfit anymore. Its biggest cash cow is providing broadband service, and it's finding surprising success as a mobile phone service provider. It's also the name behind streaming service Peacock and the U.K.'s pay-TV brand Sky, as well as parent to the NBC Network and Universal Studios. They're all well-suited, intuitive offshoots of an existing media distribution platform and infrastructure.
Microsoft (MSFT 2.34%) is another dividend-paying powerhouse that looks dramatically different than it did when it was young because adaptation made sense. Microsoft's early days were about the Windows operating system. Now Windows is just the means to a much bigger end.
3. Their dividends are affordable
Finally, safe dividend stocks represent companies that can actually afford the dividend payments they're making.
Sometimes this is a temporary challenge. That was the case back in 2016 and 2017 for heavy construction equipment maker Caterpillar (CAT 2.01%). At the time profits plunged to practically nil, but the company kept paying its dividend anyway because it didn't want to break its payout streak. It ended up being a savvy move. You may recall that profit lull was just linked a cyclical decline in demand. The company restructured to bounce back leaner than ever when the global economy was firing on all cylinders again a couple of years later.
Other times, making dividend payments proves a perpetual strain on an organization. Look at General Electric (GE 0.97%). In the 1980s and into the '90s it was practically royalty among blue chips. From the late '90s on, though, corporate bloat and a failure to fully adapt to the digital age was paired with the misguided decision to continue upping its dividend payout using money that could have been (and should have been) used to innovate and shore up structural problems. The matter become so untenable that 2008's recession nearly crushed the company, finally forcing GE to dramatically reduce its dividend payments. Without ever fully recovering, shareholders suffered a repeat of that painful decision in 2018.
The point is, just make sure there's enough cash regularly coming in to cover what's going out, with some profits left over to provide flexibility and facilitate self-investment for the company itself.
