It used to be that if you were a risk-averse investor, you
could count on
blue-chip dividend stocksto hold their own no matter what
the market was doing. Lately, though, no company has been
completely safe from the impact of the recession, and
shareholders in hundreds of companies have suffered from
dividend cuts that have ravaged their portfolios.
Yet figuring out how to stay away from stocks that will
cut their dividends is a tough assignment. Even companies
like
Dow Chemical (NYSE: DOW) and
General Electric (NYSE: GE), which had paid
steadily increasing dividends for decades, had to cut them
drastically earlier this year.
How to get some protection
Given the recent turmoil, you might feel like dividend
stocks just aren't worth the risk right now. But despite how
many companies have fallen prey to dividend cuts lately,
there are ways to predict whether
yourstock is likely to cut its dividend anytime
soon. Here are four:
Strong profits. If a company doesn't earn
much more in profits than it pays in dividends, then it's
especially vulnerable if its financial results go bad for a
year or two. On the other hand, companies that earn a lot
more than they pay in dividends can handle temporary
setbacks without putting their shareholders at risk -- and
also have extra cash available to reinvest in their
businesses or buy out other promising companies. So you
want to find companies with a low dividend
payout-to-earnings ratio.
Smart dividend yields. With dividends, it
ispossible to get too much of a good thing.
Obviously, the
higher the yield, the more income you'll get from
owning the stock. But when yields get too high, it becomes
clear that they're not sustainable, and eventually it'll
cost you when the inevitable cut comes.
Long histories of higher payouts. As GE's
recent experience shows, just because a company has a long
history of increasing dividends doesn't mean it won't cut
payouts when times get tough. But in general, a company
that strives to build a track record of higher dividends
wants to avoid ruining that record at all costs. It's far
easier, on the other hand, to cut a dividend if you haven't
been paying one for decades.
Good value. When stocks get too expensive,
it's easy for the business to get ahead of itself. That, in
turn, can lead company managers to pay dividends that prove
to be overly ambitious.
If you want to look for the safest dividend stocks, you'll
want to find ones that meet all four of those criteria. The
exact combination of parameters you look for will clearly
change which results you get. But to give you a sense of what
sort of stocks you'll find, I looked for companies with
payout ratios of 50% or less, dividend yields ranging from 3%
to 5%, P/E ratios of 15 or lower, and at least five years of
consecutive dividend increases. Here are some of the
companies I came up with:
Stock
Payout Ratio
Dividend Yield
P/E Ratio
Consecutive Dividend Increases
Procter & Gamble (NYSE: PG)
39%
3%
14.2
55 years
Johnson & Johnson (NYSE: JNJ)
41%
3.3%
13.2
46 years
Abbott Labs (NYSE: ABT)
41%
3.1%
14.0
36 years
Chevron (NYSE: CVX)
43%
3.6% Continued... |