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 long enough to pay it out?
1. National Grid
As you may have already guessed, National Grid is a utility, supplying electricity and gas to customers here in the States and in the U.K.: 3.8 million and 10.8 million customers, respectively. In the U.S., the company provides electricity to New York state, and both gas and electricity to New England. One of the great things about utilities is that once the transmission and power-generation infrastructure is built out, they don't have much else to do with the mountains of cash they collect except pay it along to their investors.
- I normally look for dividend yields of around 3% -- an arbitrary threshold, but one I feel separates the wheat from the chaff. National Grid currently pays a whopping 7.3%.
- 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 66%, National Grid's is higher than I'd like, but not dangerously so. Again, utilities have little to do with the money they collect every month except pay it out.
The company's five-year average dividend yield is 3.9%. I'd like to see that higher; it would make me more confident that the current 7.3% is going to hang around for a while. In more-heartening news, National Grid just signed an agreement that might put the company on the receiving end of up to 5,000 megawatts of clean energy generated from Ireland, to be distributed throughout the U.K., with National Grid taking a cut of the revenues, of course.
The name doesn't exactly roll off the tongue, but the business is rolling right along, and is one you'll immediately understand. Textainer buys and leases the containers that carry the world's commercial and consumer goods across the oceans and around the globe: 1.6 million of them. A very simple and very profitable business that, with no end in sight to globalization, is here to stay.
- As I said, I look for a 3% yield on dividend stocks. At 5.3%, Textainer easily makes the grade.
- At 37%, Textainer's payout ratio comes in nicely under our benchmark.
The company has a five-year average dividend yield of 5.6%, which argues very well for the sustainability of the current 5.3%. Textainer has been around since 1979, a fair amount of time, and is one of the world's largest lessors of cargo containers.
3. Bank of Nova Scotia
It's not often that a bank can be recommended to a beginning investor, but Bank of Nova Scotia is one of the few exceptions. It's Canadian, as you might have guessed, and Canada famously avoided most of the banking trouble the West experienced over the last four years. They have far stricter bank regulation up there, and make money in a much safer, more traditional manner.
- At 4.3%, Scotia easily surpasses our 3% benchmark. Even Wells Fargo
, the other rare bank that passes muster as a good beginner's investment, only manages a yield of 2.5%. (NYSE: WFC)
- At 42%, Scotia's payout ratio is pleasingly low, and therefore very sustainable. And with a payout ratio of 23%, Wells Fargo should be commended, as well.
With a five-year average dividend yield of 4.1%, it looks like Scotia's current 4.3% will be around for the long term. That's good news for dividend investors, no matter what part of North America you live in.
Who's better, who's best?
I write quite a bit about the banking sector, and I love banks that keep their heads on straight, stay out of trouble, and give their investors a strong yield: that's Scotia. And the container business -- like global trade -- isn't going anywhere anytime soon. As such, Textainer is a good company to be involved with. But utilities? They're hard to beat, because, when it comes down to it, people need utilities to live: Gas and electricity are two of the most basic services offered on the planet.
National Grid, so long as it minds its operating p's and q's, should be offering those services for a long time to come. And yes, that 7.3% is hard to pass up. But in truth, all three of these are solid 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.
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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. Follow John's dispatches from the bleeding edge of capitalism on Twitter, @TMFGrgurich.
The Motley Fool owns shares of Wells Fargo. Motley Fool newsletter services have recommended buying shares of Textainer Group Holdings, Wells Fargo, and Bank of Nova Scotia. The Motley Fool has a moving 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.