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Published: September 1, 2009
A few months ago, I clued readers in to what I
saw as "The Safest Dividend in the Dow." As you'll remember, I
tagged Verizon (NYSE: VZ) with the award, based on its
stability in the bear market, solid dividend coverage and 6.3%
yield.
The response to my article was overwhelming, and readers have
wanted even more. So I'm taking the rigorous metrics I applied
to find the safest dividend in the Dow and using them to uncover
the safest dividend in the S&P 500!
Sixty-one of the companies in the S&P 500 Index cut their
dividends in 2008, equating to $40.6 billion in lost dividend
income. Standard and Poor's itself has projected a -13.3%
decline in dividends for 2009 -- the worst drop since World War
II.
In short, it's more important than ever to take a hard look at
dividend safety before you invest for income. That's where I
want to help.
To find the safest dividend in the S&P, I'm going to look at the
same metrics I used for the Dow: yield, earnings power, dividend
coverage and track record. Let's see what we uncover.
Safety Criteria #1: Yield
When it comes to yield, it usually takes something above 6% to
garner even a second look from me. So let's start with all the
stocks within the S&P 500 that yield above that magic 6.0%
number.
As I suspected, it
turns out the common stocks in the
S&P 500 don't offer much in the way
of yields overall, but you can still
find a few individual companies
offering attractive payments.
In total, 18 stocks in the S&P (only
3.6% of the total) yield above 6.0%.
Of those, the highest-yielding stock
is Frontier Communications (NYSE:
FTR), which pays investors 14.2%
a year.
With these stocks in focus, I'll now
turn to my next metric to uncover
the safest dividend in the S&P:
earnings power.
Safety Criteria #2: Earnings
Power
It's not uncommon for "sick" stocks
to carry high yields. Based on a
poor outlook, investors will dump
the shares, boosting the yield. To
combat this potential pitfall, I'm
looking at the 1-year growth in
operating income for each of the 18
stocks with a yield above 6.0%.
Operating income is the profit
realized from the company's
day-to-day operations, excluding
one-time events or special cases.
This metric usually gives a better
sense of a company's growth than
earnings per share, which can be
manipulated to show stronger
results.
Given the downturn in the economy, I
searched for companies on my
high-yield list able to manage any
growth in operating income over the
last year, indicating the business
was still able to thrive in one of
the worst recessions in recent
memory. After screening for positive
1-year growth in operating income,
I'm left with the seven candidates
shown in my table:
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Safety Criteria #3: Dividend Coverage
No measure of dividend safety carries as much weight as the
payout ratio. By comparing the amount of operating profit earned
against how much is paid in dividends, we can know whether a
company can continue paying its current yield, even if
conditions worsen.
You can see from my table that only five companies were left
after I checked for sustainable payout ratios during the most
recent quarter. Altria, Reynolds American, and DTE Energy all
carry conservative payout ratios below 70%. HCP Inc. and Health
Care REIT sport higher ratios, but both of these are REITs
required by law to pass the bulk of their income to investors.
It's not unusual for their payout ratios (which are based on
funds from operations) to be higher.
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Safety Criteria #4: Proven Track Record
Looking into the track records of each of these five companies
offers good news for investors -- each one has a solid history.
Depending on what you look for in an investment, I'd consider
any one of the five to be the safest dividend in the S&P 500.
For example, Altria has offered 5-year annual returns of +15.8%
and throws off a 7.1% yield. Reynolds American is trading at a
-25% discount to its average 5-year price-to-earnings ratio and
has offered +10.0% annual returns since 2004. However, both are
manufacturers of cigarettes and tobacco, which many investors
choose to avoid.
Instead, Health Care REIT and HCP Inc. both have offered annual
returns near the +10% range over the last five years and haven't
had a dividend cut since they went public. These two REITS
invest in healthcare properties, which may be a more palatable
alternative to Altria and Reynolds.
The final stock I uncovered, DTE Energy (NYSE: DTE)
operates electric and natural gas utilities in Michigan. Despite
tough times in the state, the stock still manages to throw off
6.2% in dividends. You won't see much growth in the company's
operations or dividend payments like you'll find with the other
four candidates, but for a steady stream of income, DTE looks
like a winning candidate.
Good Investing!
-- Carla Pasternak
Editor
High-Yield Investing |
