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In today's environment of low interest rates, investors are left looking elsewhere for decent returns on their money. The problem is finding an income that is not only above inflation but also secure. Investors can rest safe in the knowledge that the Dow 30 stocks can be fairly safe but how safe are their yields?

Companies that offer a higher than average yield often only have such a high yield because they have been sold off by investors, pushing the stock down. To validate the strength and viability of these yields, investors often look to the dividend cover or the payout ratio to determine how sustainable the yield is. A more definitive way of analyzing the payout is to investigate the company's cash flow. This method gives the investor a better idea of where the stock is going and what future returns shareholders can expect.

So how strong are the dividends from the highest yielding stocks in the Dow 30? Is free cash flow substantial enough to ride out periods of tough trading without cutting shareholder payouts?

To find out I have screened the Dow for stocks yielding over 2%. I then ordered the stocks in order of highest to lowest yield. These were the top 5 companies with the strongest yields.

1. AT&T Inc. (T)

Overview

2011

Share price

EPS

Dividend

Yield

Dividend Cover

$34

$0.8

$1.8

5.3%

0.4

Cash Flow Statement

$US BILLIONS

2010

2011

9 Months to September 2012

Net Operating Cash Flow

35

34.7

29

Net Investing Cash Flow

-21.5

-21.3

-13.2

Cash Dividends Paid - Total

-9.9

-10.2

-7.8

Repurchase/Sale of Common & Preferred Stk.

0.05

0.23

-8.1

Issuance of long term debt (Reduction)

(5.5)

(1.3)

(1.1)

Net Financing Cash Flow

-15.9

-11.7

-16.7

Free Cash Flow

5.6

4.2

7.6

Free Cash Flow ex debt issuance/reduction

11.1

5.5

8.7

AT&T is the highest yielding stock in the DOW with a strong yield of 5.3%. However the dividend is only just covered from EPS, although looking deeper into the cash flow, AT&T can seemingly afford the payout. AT&T is buying back debt and stock and there is still a significant amount of free cash flow available after these reductions and dividend payments.

2. Verizon Communications Inc. (VZ)

Overview

2011

Share price

EPS

Dividend

Yield

Dividend Cover

$44

$1.07

$2

4.7%

0.5

Cash Flow Statement

$US BILLIONS

2010

2011

9 Months to September 2012

Net Operating Cash Flow

33.4

30

24.8

Net Investing Cash Flow

-15

-17.3

-15.4

Cash Dividends Paid - Total

-5.4

-5.6

-3.9

Repurchase/Sale of Common & Preferred Stk.

0

0.24

0.28

Issuance of long term debt (Reduction)

(9.2)

(1.2)

(3.5)

Net Financing Cash Flow

-13.7

-5.8

-12.9

Free Cash Flow

11.5

8

9.6

Free Cash Flow ex debt issuance/reduction

20.7

9.2

13.1

Verizon produces a 4.7% yield but like AT&T it is currently paying out more than it can afford from its EPS. However Verizon does have a substantial cash flow, with plenty of extra room for increased shareholder payouts. Although the company is issuing some stock, the amount is insignificant compared to the total financing cash flow. Although dividend payouts are almost double EPS, they are about half of Verizon's total free cash flow.

3. Intel Corporation (INTC)

Overview

2011

Share price

EPS

Dividend

Yield

Dividend Cover

$20.5

$2.3

$0.9

4.4%

2.5

Cash Flow Statement

$US BILLIONS

2010

2011

9 Months to September 2012

Net Operating Cash Flow

16.7

21

12.9

Net Investing Cash Flow

-10.5

10.3

-8.8

Cash Dividends Paid - Total

-3.5

-4.1

-3.2

Repurchase/Sale of Common & Preferred Stk.

-1.2

-12.3

-2.2

Issuance of long term debt (Reduction)

(0.13)

5.2

(0.2)

Net Financing Cash Flow

-4.6

-11

-5.7

Free Cash Flow

8

6

1.1

Free Cash Flow ex debt issuance/reduction

8

-12

1.3

So far Intel has the best dividend coverage in the group. However the company is coming under pressure when it comes down to cash flow. In 2011 Intel had to borrow to make its cash flow positive - as stock buybacks took the majority of free cash flow. Dividends however account for about half of the operating free cash flow as a result they look safe.

4. Merck & Co. Inc. (MRK)

Overview

2011

Share price

EPS

Dividend

Yield

Dividend Cover

$43

$2.2

$1.7

4%

1.3

Cash Flow Statement

$US BILLIONS

2010

2011

9 Months to September 2012

Net Operating Cash Flow

10.8

12.4

8.2

Net Investing Cash Flow

-3.5

-2.9

-2.4

Cash Dividends Paid - Total

-4.9

-4.8

-3.9

Repurchase/Sale of Common & Preferred Stk.

-1.2

-1.6

-1.4

Issuance of long term debt (Reduction)

0.75

(0.5)

2.2

Net Financing Cash Flow

-5.4

-6.9

-2

Free Cash Flow

1.6

2.6

3.2

Free Cash Flow ex debt issuance/reduction

0.9

3.1

1

Merck has another covered dividend but free cash flow is presenting a problem. The company is relying on debt issuance to pay the dividends this year and fund the stock buyback. Dividends are covered from cash flow but the make up the majority of financing cash flow and could start to come under pressure if cash flow does not return to 2011 levels.

5. E. I. du Pont de Nemours and Company (DD)

Overview

2011

Share price

EPS

Dividend

Yield

Dividend Cover

$43

$3

$1.7

3.9%

1.7

Cash Flow Statement

$US BILLIONS

2010

2011

9 Months to September 2012

Net Operating Cash Flow

4.6

5.2

0.4

Net Investing Cash Flow

-2.4

-6.2

-0.7

Cash Dividends Paid - Total

-1.5

-1.5

-1.2

Repurchase/Sale of Common & Preferred Stk.

0.4

0.3

0.1

Issuance of long term debt (Reduction)

(0.8)

1.6

2.5

Net Financing Cash Flow

-1.8

0.4

1.1

Free Cash Flow

1.6

1.8

-2.8

Free Cash Flow ex debt issuance/reduction

2.4

0.2

-5.3

Du Pont is the last on the list and has one of the worst looking cash flows. Since 2010 the company has been forced to issue debt to bolster the cash flow. Although the company has the best dividend coverage in the group, the dividend does take up a significant amount of free cash flow. This has resulted in the company having to issue twice as much debt this year as it did last year.

The conclusion - most of these high yielding stalwarts do seem to be secure, even though the dividend does not appear to be covered from EPS. However both Intel and Du Pont have seen significant falls in available cash flow and this could put pressure on the payouts in future. The two telecoms giants, Verizon and AT&T do not appear to be able to cover their dividends from EPS but the do appear to have significant free cash flows that all for shareholder returns and significant increases in the dividend payouts.

Source: Dow Dividend Stalwarts Under The Microscope