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3 Big, Reliable Dividends Built on Business Models Even I Can Understand

By John Grgurich – Oct 10, 2012 at 9:51AM

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Three solid companies with dead-easy business models and some of the market’s best, most-sustainable dividends.

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. Intel (INTC -6.41%)

In 1968, long before the average person was thinking anything at all about computers, scientists Robert Noyce and Gordon Moore founded Intel. By 1971, they had made the world's first microprocessor. [JG1] They rest, as they say, is history, and Intel is still the planet's dominant computer chip maker.

  • I normally look for dividend yields of around 3%: an arbitrary threshold, but one I feel separates the wheat from the chaff. Intel currently pays a healthy 4%. Chip-making underdog and rival Advanced Micro Devices (AMD 0.32%) pays no dividend at all right now.
  • I like to see dividend-payout ratios of 50% or less: as a rule of thumb, the lower the percentage, the more sustainable. At 36%, Intel's is very sustainable.

The company's five-year average dividend yield is 2.9%. I'd like to see that higher; it would make me more confident that the current 4% is going to hang around for a while. But I'm heartened otherwise on Intel: The company is finally beginning to compete with ARM, the world's dominant tablet and phone chip maker, having won the contract to supply the chip for Motorola's new RAZR i.[JG2] 

2. Automatic Data Processing (ADP -2.05%)
ADP is the payroll company. It has more than 600,000 clients, $10 billion in revenue, and has been around for 60 years, offering companies a single-source buffet of human resource, payroll, tax, and benefits administration solutions.[JG3] 

  • I said I look for a 3% yield on dividend stocks. At 2.7%, ADP misses, but just by a hair. Rival Paychex (PAYX -1.80%) does pay a 3.8% yield, but you'll see in a second why that's not always everything.
  • At 55%, ADP's payout ratio is just about perfect. At 84%, Paychex's payout ratio is very high, and makes me wonder how long the company can sustain its 3.8% dividend.

ADP has a five-year average dividend yield of 3.1%, which argues for a potentially higher dividend in quarters to come. But what I think I like best about ADP is that the company is so good at what it does, so comprehensive, and its services are so interstitially woven throughout the American economy, that its monthly payroll report is reported on by the press as widely as the federal government's.

3. California Water Service (CWT -0.59%)
What list of dividend stocks would be complete without a utility option? California Water Service was founded in 1926, and provides residential and commercial water services for about 2 million people in California, Washington, New Mexico, and Hawaii. Water, like gas and electricity, is a necessity. Other things may be struck from the family or company budget, but the water bill will always be paid.

  • At 3.4%, California Water easily surpasses our 3% benchmark.
  • At 71%, the company'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.

California Water's five-year average dividend yield of 3.1% argues well for the current 3.4% to stay around for a while. Oh, and the company just paid its 270th consecutive dividend. We love utilities around here.[JG4] 

Who's better, who's best?
It's hard to pass up utilities as dividend investments, and such is the case here with California Water. Supplying such basic human needs as heat, electricity, or water argues strongly for the staying power of these kinds of companies. 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.

Fool contributor John Grgurich 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 Intel. Motley Fool newsletter services have recommended buying shares of California Water Service Group, Paychex, Intel, and Automatic Data Processing. Motley Fool newsletter services have recommended creating a write covered straddle position in Paychex.

The Motley Fool has a gripping 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.

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