Whether you're new to investing or have been at it for a lifetime, you need to understand the business models of the companies you invest in. Understanding exactly how a company makes money greatly reduces your overall investing risk.
In that spirit, today we're going to look at three companies with straightforward business models and strong dividends, focusing on companies that have been around awhile and look like they're going to stay around. Because what good is a great dividend if the company's not going to be there to pay it out?
Without further ado, then, here are three, big safe dividend stocks for the beginning investor, along with my personal favorite reasoned-out at the end:
1. JPMorgan Chase
Yes, this is the Wall Street investment bank that's been in the news of late due to a surprise $2 billion trading loss, but fear not. With total assets of $3.4 trillion and $90.5 billion in revenue over the past 12 months producing net income of $17.45 billion, $2 billion is no big deal for the country's biggest bank. It's a rock-solid bank with one of the best CEOs in the business in charge: Jamie Dimon.
Now let's have a look at some important numbers for the lending and investing giant:
- I normally like to see dividend yields of around 3%: an arbitrary threshold, but one I feel separates the wheat from the chaff. JPMorgan pays a generous 3.6%. Rival superbank Citigroup
currently pays only 0.1%, part because of its poor performance on a recent Federal Reserve stress test (which JPMorgan aced). (NYSE: C)
- I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable. At 22%, JPMorgan's is very sustainable.
JPMorgan has a five-year average dividend yield of 2.5%. It would be nice to see that closer to what the current dividend is, but all the big banks are just coming out of Fed-mandated balance sheet repair periods; as such, yields are just beginning to return to normal again in the four years since the financial crisis began.
You might not know the name "Gannett," but you probably know USA Today, CareerBuilder.com, and very likely at least one of the company's 82 daily newspapers or 23 local television stations. USA Today is the country's second leading national daily, after The Wall Street Journal. The death of the printed word has been greatly exaggerated, but even beyond that Gannett is well-diversified enough into television and the Web that it should remain competitive in the media sector for a long time to come. Now let's have a look at some important numbers for this news and information giant:
- At 6.3%, Gannett murders my 3% benchmark. Rival The New York Times Company
pays a dividend of exactly "zero." (NYSE: NYT)
- Gannett's payout ratio, at 22%, makes this another dividend that's easily sustainable.
- Gross margin is an indicator of brand strength -- an important component of pricing power -- and production efficiencies, both of which directly affect the bottom line. Relative gross margin gives you a rough idea of how dominant the company is in its sector and how strong of a performer it is relative to its peers. (We didn't talk about gross margin with banks because it just really doesn't apply to that sector.) Gannett comes in at 43.1% for this important metric over the past year, just shy of the industry average of 45.6% and below The New York Times' gross margin of 58.9%. Gannett could learn a thing or two from its rival here; it would make a difference on the company's bottom line.
With a five-year average dividend yield of 5.7%, you know that the killer 6.3% yield isn't just a fluke. And like most other big media companies, Gannett is wisely in the process of putting up paywalls for many of its previously free newspaper sites. Soon, this will be the norm across the Web, and it's good to see that Gannett is on board.
3M famously has its hands in a little bit of everything and has done very well at it since 1902. Consumers know the company for such iconic brands as Scotch tape, Post-it notes, and Scotch-Brite dish scrubbers. Businesses know it for a wide array of indispensable, behind-the-scenes products that penetrate every imaginable sector of industry, including transportation, health care, security, and displays and graphics.
Let's have a look at some important numbers for this Minnesota-based manufacturing stalwart:
- 3M's 2.7% yield just misses the dividend benchmark of 3%. But that's close enough for jazz, especially considering what a consumer and industrial powerhouse it is.
- At 37%, 3M has a beautiful, very-sustainable payout ratio.
- Finally, the company's gross margin of 47% nicely beats the industry average of 32.3%.
3M's five-year dividend average is 2.7%, boding well for sustaining at least that payout level into the near future. And the 110-year-old company just made Fortune's list of most admired companies for 2012.
Who's better, who's best?
Gannett's 6.3% yield is hard to pass up, and JPMorgan's 3.6% is also very enticing, but I'm going to call this round of "3 Big, Safe Dividend Stocks for the Beginning Investor" for 3M. The company is just such an enduring American brand, slugging it out seemingly forever in the ever-changing and ever-fickle worlds of both consumer and industrial manufacturing. 3M has stayed competitive -- and profitable -- for so long that I think it's worth trading away a bigger dividend knowing this company and its yield are as solid a bet for the future as you can get.
And there you have it: three great companies with business models any investor can get their head around, and stocks that offer some of the market's best, most sustainable dividends. If today's column has left you wanting more, check out this free Motley Fool special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." The title says it all. Get your copy while the stocks are hot by simply clicking here now.