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?
Monopoly. Playskool. Play-Doh. Nerf. Any of these brands sound familiar? Unless you grew up in a Tibetan monastery, they probably all do. Hasbro's stable of brands are children's classics. And the great thing about a toy company is, even in tough economic times, parents still shell out for their kids.
- I normally look for dividend yields of around 3% -- an arbitrary threshold, but one I feel separates the wheat from the chaff. Hasbro currently pays a healthy 3.8%. Perennial rival Mattel
is in the same range, with a yield of 3.5%. (Nasdaq: MAT)
- I like to see dividend-payout ratios of 50% or less -- as a rule of thumb, the lower the percentage, the more sustainable. At 48%, Hasbro's is right in the pocket. To its credit, so is Mattel's, at 49%.
Hasbro's five-year average dividend yield is 2.7%. I'd like to see that higher; it would make me more confident that the current 3.8% is going to hang around for a while. But I'm heartened otherwise: The company owns the licensing rights to modern brand powerhouses like Star Wars and Marvel, a sign the toy stalwart isn't resting on its past laurels, considerable as they might be.
2. Waste Management
I've written about Waste Management before, and have returned for good reason: It's a solid company that does an indispensable service for humankind. Oh, and it pays a great dividend. There's nothing sexy or exciting about hauling away trash, but it needs to be done. You might as well make some money off it.
- I said I look for a 3% yield on dividend stocks. At 4.3%, Waste Management easily makes the grade, and even beats its worthy rival Republic Services
, which has a dividend yield of 3.3%. (NYSE: RSG)
- At 70%, Waste Management's payout ratio comes in a little on the high side. Republic, however, is right on the money on this metric, at 49%.
Waste Management has a five-year average dividend yield of 3.5%, which doesn't argue particularly well for the sustainability of the current 4.3%. For those who care (like myself), though, the company is very committed to eco-friendly services, and has made being green a fully integrated part of its business model. And why shouldn't it? There's money to be made there.
3. Piedmont Natural Gas
Piedmont delivers natural gas to 1 million customers in North Carolina, South Carolina, and Tennessee. And unless you've been hiding under a rock for the last few years -- a very big one -- you know that the U.S. is experiencing a natural-gas boom. Companies like Piedmont are perfectly positioned to make the most of it -- for both customers and investors.
- At 3.7%, Piedmont easily surpasses our 3% benchmark.
- At 76%, Piedmont's payout ratio would normally be considered high, but not for a utility, which doesn't have much else to do with all the money it collects except pay it out to investors.
With a five-year average dividend yield of 3.8%, it looks like Piedmont's current 3.7% will be around for a while. And in June, the company announced the completion of a pipeline project which will deliver natural gas to a state-of-the-art electrical plant in Goldsboro, N.C. Natural gas is clean-burning, and with so much of it becoming available at better and better prices, it will increasingly be seen as the preferred alternative to coal for power generation.
Who's better, who's best?
In general, it's hard to pass up utilities as dividend investments, and such is the case here. Supplying such a basic human need as heat, or fuel for electricity generation, argues strongly for the staying power of these kinds of companies. And with natural gas booming like it is, and such a strong five-year dividend average, Piedmont is my investment of choice out of the above three. 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 Hasbro and Waste Management. Motley Fool newsletter services have recommended buying shares of Mattel, Waste Management, Republic Services, Hasbro, and Piedmont Natural Gas. Motley Fool newsletter services have recommended creating a bear put spread position in Mattel and creating a write covered strangle position in Waste Management. 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.