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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:
|
Company |
OI
Growth |
Yield |
|
Integrys Energy (NYSE:
TEG) |
+54.4% |
8.0% |
|
Pepco (NYSE: POM) |
+10.9% |
7.6% |
|
Reynolds American (NYSE:
RAI) |
+1.9% |
7.5% |
|
Altria (NYSE: MO) |
+26.0% |
7.1% |
|
HCP Inc. (NYSE: HCP) |
+9.8% |
6.9% |
|
Health Care REIT (NYSE:
HCN) |
+9.9% |
6.8% |
|
DTE Energy (NYSE: DTE) |
+25.7% |
6.2% |
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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.
|
Company |
Payout Ratio* |
|
Altria (NYSE: MO) |
38% |
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Reynolds American (NYSE: RAI) |
38% |
|
Health Care REIT (NYSE: HCN) |
91% |
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HCP Inc. (NYSE: HCP) |
84% |
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DTE Energy (NYSE: DTE) |
66% |
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*Payout ratio for
the most recent quarter,
according to Bloomberg. Based on
operating income for MO, RAI,
and DTE. Based on funds from
operations for REITs HCN and HCP. |
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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's Dividend Opportunities
P.S. -- The distributions of the five companies I found
above look safe, but should only be a starting point for
further research. And remember, just because these
payments look safe now, doesn't mean they will be forever --
I always keep continual watch of the distributions for every
security I hold.
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