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, here are three, big safe dividend stocks for the beginning investor, along with my personal favorite reasoned-out at the end:
Many people were introduced to Aflac by the almost-talking duck from the company's now famous television commercial. The duck had nothing to do with "supplemental insurance" -- Aflac's product -- but it got viewers' attention and served to introduce the world at large to Aflac and what it sells.
Supplemental insurance is exactly what it sounds like: life and health insurance over and above what you already have. That is, if you feel your already-existing policies have coverage gaps, Aflac will sell you a policy that fills those gaps in. Pretty simple. Now let's have a look at some important numbers for the insurance giant:
- I normally like to see dividend yields of around 3%: an arbitrary threshold, but one we feel separates the wheat from the chaff. Aflac pays a generous 3.4%. Rival Allstate
only pays 2.6%. (NYSE: ALL)
- I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable. At 25%, Aflac's is very sustainable. At 41%, however, Allstate is also doing a good job keeping its dividend strong over the long term.
- Gross margin is an indicator of brand strength -- an important component of pricing power -- and manufacturing 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.
Aflac's gross margin is 26.6%, which isn't stunning in absolute terms, but it does beat the industry average of 25.49%. Allstate comes in considerably less on this important metric, with a gross margin of only 16.2%.
Aflac has a five-year average dividend yield of 2.2%. It would be nice to see that closer to what the current dividend is, but at least the company just turned in astonishing quarterly results: year-over-year revenue growth of 20.3% and year-over-year earnings growth of 101.8%.
Gotten onto an airliner lately? If so, it was very likely one of two makes: Boeing or Airbus. These two companies dominate the heavy-aircraft market. And while both are roughly neck-and-neck in terms of market share, Boeing is the company with the longest record and arguably better pedigree.
Boeing has been making aircraft since 1916, for both the commercial and military markets. The airplanes -- and the business -- are legends in their own rights. And it's hard to imagine a simpler business model: manufacturing and selling airplanes. Now let's have a look at some important numbers for this bastion of American heavy industry:
- At a dividend yield of 2.5%, Boeing misses the 3% mark, but not by much. The company is such a long-lived powerhouse it's worth serious consideration even if it does miss our benchmark by a bit.
- The company's payout ratio, at 29%, makes this another easily sustainable dividend.
- At 18.2%, Boeing's gross margin is nothing to write home about and actually comes in below the industry average of 26.9%. As such, the company could stand to tighten up things in the top lines of the income statement. Anything that can be saved farther up the line directly affects what's left over on the bottom line, i.e., profits.
Boeing is on a roll of late -- racking up order after order for its more basic flying machines, like the ubiquitous 737, to its latest and greatest commercial jet, the 787 Dreamliner. And for the most recent quarter, the company grew revenue at a big, bold 30% year over year and grew earnings at an even bigger, bolder 57.5%.
Nucor makes steel. How much more fundamental and straightforward can you get? The company's been in business since 1940 which, in the steel industry, is not old. Maybe because it doesn't have its roots way back in the 19th century, it's been able to embrace new methods and technologies that have allowed it compete into the 21st century with the giants of the industry, like United States Steel
Let's have a look at some important numbers for this North Carolina-based manufacturing upstart:
- Nucor pays a robust dividend of 4%, blowing past the 3% benchmark and easily besting U.S. Steel's 0.9%.
- At 61%, Nucor's dividend payout ratio is a bit on the high side, but nothing to worry about.
- Nucor's gross margin is 9.4%, and U.S. Steel compares with 9.2%. With the industry average at 18.6%, both companies could stand to sharpen up their game a bit here.
Nucor's five-year dividend average is 3%. It would be nice if this were a bit higher, but it's also good to see the company expanding operations and on the move. On May 17, Nucor announced it would purchase Skyline Steel, a specialty steel producer that Nucor has partnered with for 20 years.
Who's better, who's best?
My pick of the three is Boeing. Yes, the stock with the lowest dividend yield of the three. Here's why: Boeing has been around for so long, yet far from losing its momentum or competitiveness, the company is doing better than ever with orders still pouring in from airlines all over the world.
And the U.S. military relies heavily on the company, as well. There's just no escaping Boeing. Airbus is a worthy rival, and there's talk of China trying to get into heavy aviation, but that's a long ways away. Boeing's long track record gives it a significant advantage when it comes to deciding on an airplane an airline is willing to risk people in.
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.
Fool contributor John Grgurich would love to stop and chat, but is busy buzzing the tower at Heathrow in his hot-rodded B737. For the record, John owns no shares in any of the companies mentioned in this column. Motley Fool newsletter services have recommended buying shares of Aflac and Nucor. The Motley Fool has a hilarious disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.