What makes a dividend stock ultra safe? A track record of dividend raises is certainly top of mind. But for a company to continue raising its dividend well into the future, it also has to have consistent earnings and cash flow growth so it isn't funding its dividend with debt.
Neither Southern Company (SO -1.56%), a utility, nor Clorox (CLX -0.69%), a well-known consumer staples company, are going to impress investors with star-studded growth prospects. But they do have the stable business models necessary to support year after year of dividend raises.
Here's why these two ultra-safe stocks are worth a look, especially if you're a risk-averse investor or are looking to supplement income in retirement.
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Give your passive income a jolt with Southern Company
It's hard to find a safer utility stock than Southern Company. The Atlanta-based company features a juicy 4% dividend yield backed by 76 consecutive years of consistent or higher dividend payments.
Like other major electric utilities, Southern Company has a core vertically integrated generation, transmission, and distribution business -- which holds a virtual monopoly over Georgia, Alabama, and Mississippi. But it also has a gas distribution business as well as its Southern Power segment, which constructs, acquires, owns, and manages generation assets. The company's sizable wind and solar portfolio falls under the Southern Power segment.
Southern Company is similar to a popular utility like NextEra Energy, which has its regulated electricity business while also investing in generation assets and then selling that power on the wholesale market. However, the primary difference between Southern Company and other utilities is that it has been historically conservative with its capital allocation. This conservative bent means that Southern Company is behind other utilities in the energy transition, but it also avoids the issues that can arise with overspending.
For example, Southern Company's new renewable projects are being gradually phased in. The company still depends mostly on natural gas, while coal and nuclear contribute a meaningful amount of the company's energy mix. Southern Company is embracing renewable projects, but it is doing so in a measured way to make sure that its growing capital expenditures don't get out of hand.
It's important for investors to monitor Southern Company's investments and its spending. New projects should be able to generate steady cash flows and support dividend growth. But for now, Southern Company has been spending more aggressively in terms of capital expenditures as a percentage of revenue and relative to operation cash flow.
SO Revenue (TTM) data by YCharts
All told, Southern Company features a sizable yield and a track record for consistent dividend payments and raises –- making it one of the safest utility income stocks -- and income stocks in general -- on the market today.
Clorox is so much more than just cleaning products
Clorox stock looks a bit crazy when you zoom out because it got caught up in an ill-fated frenzy of pandemic-induced hype as investors cheered the trend toward hygiene and germ prevention. It's a trend we would all like to see last. But at the end of the day, Clorox has never been a growth stock. The best way of viewing the company is through the lens of its powerful portfolio of brands and diverse market position.
The company has a nice brand mix across cleaning, professional products, bags, wraps, cat litter, grilling, water filtration, food, and personal care. So this is much more than just a cleaning products business. Aside from Clorox, the company owns recognizable brands like Brita, Burt's Bees, Glad, Kingsford (the charcoal company), Match Light, Pine-Sol, and dozens of others.
The issue for Clorox isn't its brand or product mix, but rather, the struggle to combat inflation. The advantage of consumer staples companies like Clorox is that they tend to be resistant to economic cycles and fluctuations in consumer spending. However, Clorox and its peers haven't been immune to rising input costs due to inflation.
There are many examples of how inflation can impact a company like Clorox. But perhaps the easiest to understand is oil. Higher oil prices mean higher transportation costs and higher costs for refined petroleum-based products, like the plastic containers and lids that Clorox uses to sell the vast majority of its products. The solution is to pass along costs to consumers. But that task has gotten increasingly harder due to a cost-conscious consumer.
Clorox is no stranger to economic cycles. In fact, it has raised its dividend every year since it began paying one in 1986, putting it on track to become a Dividend King by 2037.
The sell-off in Clorox stock has pole-vaulted the dividend yield to 3.5%. Down over 15% in the last three months alone, Clorox stock certainly looks like a safe play worth considering.
A rare blend of safety and yield
What separates Southern Company and Clorox from other safe dividend stocks is their combination of stable business models, a track record for dividend raises, and their high yields. For example, there are 49 Dividend Kings, but only seven of them are large-cap stocks that yield over 3%.
A safe stock with a low yield isn't as attractive, given the 10-year risk-free Treasury rate is now 4.5%. Southern Company and Clorox give investors a yield close to the risk-free rate with the added potential upside (and risk) that comes from investing in the stock market.
Add it all up, and these two stocks are a good option for investors looking for a high yield, backed by companies that are committed to present and future dividend payments.
