In times like these, we are all trying to find safe investments that will protect us from today's markets. High-yielding stocks are an attractive alternative for many investors. Especially when one considers that dividends are a major part of earning good overall stock market returns. For instance, from 1926 to 2006, dividends accounted for 41% of total stock market performance.
OK, I get it. Dividends are good.
However, the lure of a high dividend yield can be dangerous. The dividend may not be safe. Usually the dividend yield increases because the stock price decreases. A decrease in price can be a sign of trouble within the company that could potentially imperil the dividend. Therefore, investors need to examine the underlying business that supports the dividend.
We will first use the Motley Fool CAPS screener to identify a few stocks awarded four and five stars (maximum) by the 115,000-plus member CAPS community that have dividend yields between 5% and 10%. The highest-rated stocks in CAPS have had stellar records, so we'll concentrate only on those. Then, we will examine them for signs of dividend stability.
Company
CAPS rating
Dividend yield
Dividend payout ratio
Altria (NYSE: MO)
*****
6.3%
76%
AT&T (NYSE: T)
****
5.7%
68%
Duke Energy (NYSE: DUK)
*****
5.3%
67%
Pfizer (NYSE: PFE)
****
6.7%
92%
Verizon (NYSE: VZ)
****
5.9%
83%
Source: Motley Fool CAPS and Yahoo! Finance.
These stocks are not recommendations but rather possible starting points for further research.
Pfizer
Sure, the stock looks cheap here. It hasn’t been at this price in about eleven years. But is the dividend secure? I don’t think so. The 92% dividend payout ratio is double the industry average. In addition, with Lipitor coming off patent in 2011, Pfizer will lose most of the revenue associated with a $13 billion per year drug. Pfizer has been steadily growing the dividend over the past couple of years, but at the same time, net income in the trailing period is less than half of what it was for 2006. I'm not sure this is sustainable.
Altria
A 76% dividend payout ratio is OK for a cash machine like Altria and is right near the targeted payout ratio indicated in the latest 10-Q of 75%. Also, the company seems to have plenty of free cash flow to cover the dividend. Even though the total dividend paid out has dropped after the spin off of Philip Morris International (NYSE: PM), the acquisition of US Tobacco (NYSE: UST) should counteract that to some extent. I think this one is pretty safe.
AT&T
AT&T is the largest telecommunications company by revenue in the world. It is the No. 1 provider in the U.S. of wireless, broadband, business and voice services, and directory services. The company has achieved solid profit growth and double-digit EPS growth over the past several years. AT&T also has good cash flow. The 68% payout ratio is a tad high relative to the industry, but I donâ??t see any reason at this point why the telecom giant canâ??t maintain the dividend.
Duke
Duke Energy has outperformed the S&P 500 for the past one, three, and five year periods. Utilities are generally a recession-resistant business (people need their power, after all). With a history of paying dividends for 82 straight years, even though the payout ratio is high relative to utilities in general, it should be pretty safe.
Verizon
The company is competing with AT&T to be No. 1 in wireless. They also offer FiOS for phone, computer, and cable across the country. Although Verizon appears financially capable of maintaining the dividend for now, it seems contradictory that it would continue to pay out 83% of net income and half of free cash flow to shareholders while trying to grow bigger than a company like AT&T. Verizon may choose growth over dividends in the future.
Final thoughts
Investing in solid dividend-paying stocks in this environment is a smart thing to do. However, do your homework, and make sure you get companies that will maintain the dividend.
|