One of the best parts about dividend investing is that most companies pay their dividends based on the strength of their business results, not the current whims of the market. In times like these, when share prices have been trending downward, that cash looks far more attractive than it did when stocks were soaring.
Of course, as nice as they are, dividends are never guaranteed payments. If a rough economy means a company isn't generating cash, that dividend could get cut, which would be likely to hurt its share price even more. So when hunting for dividend payers, it's important to look for signs that a company can keep making those payments to its shareholders.
With that in mind, three Motley Fool contributors went searching for companies whose dividends look safe right now. They came up with Coca-Cola (KO), Federal Realty Trust (FRT -0.37%). and Genuine Parts (GPC -0.71%). Read on to find out why, and then decide for yourself whether their dividends really do look safe enough to justify buying their shares.
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Safe dividend, but potentially a flat investment
Jason Hall (Coca-Cola): Warren Buffett fans love to point to Coca-Cola as a wonderful investment, and for some very good reasons. The company has wonderful economic moats, including brand power, cost advantages as a producer, and some degree of pricing power in the marketplace. As a result, it has been able to hold very high gross margins in the high 50% range for years, and it has improved its operating margin from the low 20% range to the high 20% range over the past decade.
As a result, even in an environment where consumer tastes have changed, Coke's dividend has grown an average of about 5% a year for the past decade, driving much of Coke's 90% in total returns over that period. And if it's a safe dividend you're after, Coke passes that test with flying colors. With a payout ratio of 56% on an earnings basis and a 62% cash payout ratio, the company has a very wide margin of safety to keep paying shareholders and even continue growing the payout.
Here's the rub. Despite the Buffett bonafides, Coke stock really hasn't been a great investment. Since 2000, Coke has delivered 271% in total returns, while the S&P 500 has returned 356%.
Looking ahead, we can see that it's not cheap, either, trading for 23 times trailing earnings and 25.6 times free cash flow. That's a pricey multiple for a low-growth stock with a dividend yield not much more than 3%.
Put it all together, and if it's a safe dividend that can grow modestly, Coke has it. But if you're looking to compound your total wealth, there are more bubbly dividend buys out there, including the two my colleagues will cover.
Turning to the (relative) stability of real estate
Eric Volkman (Federal Realty Investment Trust): Stability and prosperity are kings at Dividend King Federal Realty Investment Trust. The company is an old-school, rather selective real estate investment trust (REIT) that focuses on retail properties in major markets throughout the United States.
The slow burn of the retail apocalypse has burned numerous store operators and landlords, but Federal Realty is insulated from this problem to a high degree. The company's unwavering strategy has been to plant its flag in relatively affluent areas in urban locales where commerce is relatively more resilient. We're talking places such as San Jose, California; Greenwich, Connecticut; and Miami.
What's more, around 75% of the REIT's properties hold grocery stores. The smart and very advantageous thing about this business approach is that such places attract lots of customer traffic, much of which is recurring. We never stop needing groceries, after all. At least some of this traffic spills out into other types of stores, boosting the performance of the property as a whole.
Meanwhile, Federal Realty is always looking for ways to increase that traffic, and it has been admirably creative and innovative in doing so. This isn't a REIT that buys a property, passively manages it, and hopes for the best.
The proof is in the numbers. In its most recently reported quarter, revenue rose by 6% to nearly $281 million. Funds from operations -- or FFO, the most closely watched REIT profitability metric -- improved at a 4% clip. While some might not consider these to be hot growth figures, they are impressive for the often slow-moving retail REIT segment. They're also admirable considering that Federal Realty has been in business since 1962.
Over that stretch of time, it's run a dividend-raising streak that's longer than many of us have been alive. Its most recent increase made this streak a hard-to-conceive 56 years in a row. The current quarterly payout is $1.09 per share, equating to a satisfyingly thick 4.8% yield.
A company that should do well in tough times
Chuck Saletta (Genuine Parts): When money is tight and you're worried about your job, how likely are you to run out and buy a brand-new car? Most people in that situation would rather spend a few hundred dollars on maintenance and repairs to keep an older car going than spend tens of thousands of dollars on a new vehicle.
It's that sort of kitchen-table logic, repeated millions of times across households nationwide, that has given Genuine Parts the ability to pay and increase its dividend for a whopping 67 consecutive years. As you might be able to infer from its name, Genuine Parts is best known for selling car parts, through its NAPA auto parts stores. It also has an industrial parts division that, similarly, makes its money supplying the parts that keep existing machinery going.
A business like that -- associated with repairing and extending the life of very expensive and vital pieces of equipment -- is one that provides a great reason to believe its dividend will continue in tough times. On top of that structural benefit, Genuine Parts' current dividend consumes only around 43% of the company's earnings. That reasonable payout ratio means that its earnings could fall by half, and it still wouldn't technically have to cut its dividend.
While a dividend is never a guaranteed payment, when you put those pieces together, the end result is a business whose dividend looks to be among the safer ones around at the moment.
Defense really can win championships
Coca-Cola, Federal Realty Trust, and Genuine Parts wouldn't win any contests for the fastest growing companies on the planet. Yet what they do have are business models well tuned to have a great shot of making it through tough times while continuing to reward their shareholders along the way. If the market's current jitters have got you worried, now is a great time to consider whether one or more of these stalwarts may deserve a home in your portfolio.
