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, because understanding how a company makes money will significantly reduce your overall investing risk.
In that spirit, today we'll look at three companies with straightforward business models, strong dividends, and a knack for longevity. Because what good is a great dividend if the company's not going to be around to pay it out?
Without further ado, then, here are three, big safe dividend stocks for the beginning investor, along with my pick:
For those who like to do it themselves, and for whom neighborhood hardware stores were just not enough, there's Lowe's, with acres of anything and everything the home repairer and home remodeler could ever need. Lowe's and its perennial rival, Home Depot
Unlike in many other countries, where home ownership is still a privilege of the wealthy few, in America it's viewed very nearly as a divine right. As such, stores like Lowe's and Home Depot aren't in danger of vanishing anytime soon. Let's look at some important numbers for the DIY giant:
- I normally like to see dividend yields of around 3%: an arbitrary threshold, but one I feel separates the wheat from the chaff. Lowe's pays 2.5%: under our threshold, but close enough to enjoy consideration as one of our dividend stocks. And Lowe's yield does beat Home Depot's 2.3%.
- I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable it is. At 37%, Lowe's falls well below our 50% mark, as does Home Depot, at 41%.
Lowe's five-year average dividend yield is only 1.7%; frankly, it would be nice to see that closer to what the company is paying today. But now that we're seemingly past the worst of the real-estate crisis, I'm hopeful Lowe's can at least keep up its 2.5%. The company also had a great recent quarter, with year-over-year earnings growth of 14.3%.
This is not Cisco, the IT services giant. This is the other Sysco: the food-services giant. Sysco provides foods primarily for the restaurant industry, or any institution that needs to feed people on a mass level. Specifically, Sysco sells frozen foods, canned and dry foods, fresh meats and dairy products, beverage products, and fresh produce. It also sells paper products -- such as napkins, plates, and cups -- as well as cookware.
Basically, Sysco sells anything restaurants or the like need to get by, which makes life a whole lot easier for them, especially if they're a chain. Now, a few important metrics:
- I said I look for a 3% yield on our dividend stocks. At 3.8%, Sysco easily surpasses that benchmark.
- At 41%, Sysco's payout ratio is very sustainable.
Sysco has a five-year average dividend yield of 3.3%, which bodes well for the sustainability of the current 3.8%. Everyone loves to eat out, and if you're a student away at college or have a workplace cafeteria plan, you may have no choice in the matter. As such, eating away from home is here to stay, along with one-stop-shop companies like Sysco.
3. Linn Energy
Linn is a publicly traded limited liability company that has partnership tax status. Like master limited partnerships, which Congress grants an exemption from taxes at the company level to encourage development of America's energy infrastructure, Linn transfers nearly all of the profits it generates to its unitholders.
Linn acquires and develops oil and natural-gas properties, of which the latter is positively booming these days, what with the introduction of fracking techniques. Let's have a look at some important numbers for the company:
- Linn pays a whopping 7.3% yield. As mentioned previously, Linn passes on all its available cash to investors.
- At 56%, Linn's payout ratio is surprisingly low compared with MLPs, which just makes that sweet 7.3% all the more sustainable.
Linn Energy has a nice five-year average dividend yield of 9.9%. And in 2006, Linn became the first publicly traded independent oil and natural gas limited liability company, and has consistently paid a quarterly distribution to its unitholders. Linn delivered its 23rd consecutive quarterly distribution in 2011.
Who's better, who's best?
Perhaps you think it unfair of me to place Linn Energy and its 7.3% yield up against Lowe's and its 2.5% payout and Sysco and its 3.8%, but I swear I wasn't setting up straw men for Linn to easily decimate. Not all investors are comfortable with oil and gas producers and the controversial environmental side effects that come with them. Also, the energy sector isn't as easy to get one's head around as, say, supplying the restaurant world with food, or the builder world with lumber and nails. But at 7.3%, Linn really is too good to pass up.
So there you have it: three great companies with business models any investor can get his or her 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 brand new, free Motley Fool special report: "3 Dow Stocks Dividend Investors Need." 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 too engrossed in the bond-yield section of Financial Times. 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 Home Depot and Sysco, as well as writing covered calls on Lowe's.
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