Barron's: Best Dividend Plays for 2009

It's getting harder to have confidence in dividends when so many former stalwarts are reducing their payments or cutting them altogether. 2009 will likely see the largest annual decline in S&P dividends since 1942, and even those forecasts are optimistic. So Barron's has compiled a list of S&P 500 companies with reasonably secure dividend yields of 4% or more.

The list takes into account industry conditions, financial strength and dividend-payout ratios. It also excludes electric utilities, many of which have secure 4%-plus yields.

Altria (MO), the maker of Marlboro cigarettes, and Reynolds American (RAI), maker of Camel and Winston brands, both have high payout ratios, with both firms aiming to distribute 75% of profits in dividends. Though consumption is falling generally, tobacco's addictive nature give these companies pricing power, even in a recession.

The list mostly contains defensive consumer names, but also includes riskier choices like Meredith (MDP). Meredith raised its dividend by a penny recently, but has been hit hard by a drop in print advertising.

The drug sector takes four slots on the list. Dividends look secure at Merck (MRK), Bristol-Myers (BMY), Eli Lilly (LLY) and Pfizer (PFE).

Dividend yields are high in telecom but lofty payout ratios present a potential concern. Verizon (VZ) and AT&T (T) made the list with 6%+ yields. Embarq (EQ) made the list with a yield of nearly 8%. The risk with all three is exposure to the declining wireline phone business.

Heinz (HNZ) and Kraft (KFT) represented foodmakers on the list, with dividends of 4.8% and 4.6%, respectively. Heinz is expected to give its dividend a small boost in May.

Other companies on the list: V.F. Corp. (VFC), International Game Technology (IGT), (LO), PPG Industries (PPG), Whirlpool (WHR), Nordstrom (JWN), Kimberly-Clark (KMB), Eaton (ETN).

Comments

[guliamo:]

What's the deal with dividends anyway?
As a friend of mine says - Dividends are just a clever way for the government to tax you before you sell the stocks.

Feb 15 05:06 AM

[Alan Brochs...:]

I wasn't very impressed with this list at all. In fact, I published a list of stocks that I thought might see lower dividends this year (seekingalpha.com/artic...), and a couple of mine overlapped. Generally, though, it appears that the author didn't really consider the capital structure of these firms or the potential for further earnings erosions. Many of these companies have significant debt burdens, some of which is short-term. Even if they pay their current dividends, I would project price declines at many of these companies will more than offset those gains. I have written negatively specifically on KFT (seekingalpha.com/artic...), which I believe has more downside.

Feb 15 08:29 AM

[Stoex:]

These types of articles end up causing investor pain as they look for the magic potion......

Don't let the reference to "Barrons" weigh on any action steps in regards to dividends. Go back to the January 2008 article in Barrons and see which companies show up as safe. Why my goodness GE is one of the names AND look where shareholders find themselves now - a stock inwhich just about a month ago the CEO was mouthing off about a secure dividend for 2009. Now out of the other side of his mouth shareholders hear the word "review". DOW had similar CEO lip service as did BAC about 6 months ago. NEVER, absolutely NEVER go by what the CEO spouts off in regards to the dividend. Do some simple homework starting with "what is the business demand" of consumers that puts cash into the companies pockets. Also be aware of cash positions, debt, payout ratio, pending lawsuits and earnings from continuing operations. If your company adds to earnings through asset sales - run for the door.
Lastly, do a little arithmetic and see what options are telling you in your company. Its not a certainty calculation but a general barometer.

Feb 15 09:31 AM

[Artiecab:]

What's wrong with PHK's dividend?

Feb 15 10:09 AM

[Wide Moat I...:]

Beware also of Embarq's load of debt.

And Barron's, c'mon, Nordstrom's dividend is safe? Same store sales were down 11.4% in January. There is plenty of debt there as well

Feb 15 10:18 AM

[prudentinve...:]

Do you really think the WHR dividend is "reasonably secure"!? How about the pharmas? PFE just halved theirs, so how can you be sure that BMY or MRK or others will not? How about tobacco, where we have glimpses of potential new litigation? You already mentioned that T and VZ may be at risk due to high payout ratios, so I will not add them here.

Bottom line is that very few are "reasonably secure". Even those that should be, really are not, since crony boards prefer to cut dividends before they touch executive compensation. After all, the recent business model has become that the real owners of a company, the shareholders, always get short shrift, while their employees (the management) busily reward themselves with the shareholders' money. This sorry state of affairs is an additional discount factor you have to apply when investing in dividend stocks.

Feb 15 10:19 AM

[HiSpeed:]

Dividend isn't worth much if the stocks gets cut in 1/2

Feb 15 11:09 AM

[notsosmart:]

just remember its all ponzi. you cant trust what any ceo tells you.the bod's are just self serving. the pols are all liars.to the best of your ability think for yourself & trust no one with your money.

Feb 15 11:33 AM

[auto44:]

It is hard in this envrionment to think anythig is safe. It is very hard to see with any clairity how future sales and and profits will work out. As forAltria the long time reputation of their management is to do what is in the best interest of the stock holders. That attitude gives me comfort in difficult times. That of course does not remove all risks especially in an industry that constantly under litigation. But all businesses face risk and it helps when the management is seasoned and honest. i know a lot of peplle would not invest here because of the damage smoking does to peoples haealth and to the health of our health care system. if it is an ethical choice on your part not to invest in this sstock then by all means find another venue to invest in. Former smoker and (MO) share holder.

Feb 15 11:41 AM

[Trane250:]

Not one utility stock. Hmm.

Feb 15 03:10 PM

[Urbane Gori...:]

More to the point, chasing dividends provides a false sense of security as the investor consoles himself with equity loss by focusing on the dividends. I was horrified to hear Jim Cramer pushing dividend stocks as a good bet in this economy, and mildly mollified when he changed his tune weeks later to 'Dividends don't guarantee good returns, you just won't lose as much'.... In fact, when (not if) the dividend is cut, the underlying stock or ETF tanks. There is no safety in this market.

jegan




On Feb 15 05:06 AM guliamo wrote:

> What's the deal with dividends anyway?
> As a friend of mine says - Dividends are just a clever way for the
> government to tax you before you sell the stocks.

Feb 15 04:03 PM

[David Van K...:]

Dividend investing strategies play out over years and decades, not in a single year or two. Someone following a dividend strategy is focused on three things: initial yield, sustainability, and likely growth of the dividend over time. He or she does not ignore price fluctuations, but cares less about them because the dividend is the important thing.

Like other stocks intended to be held awhile, dividend stocks should not be purchased at bad valuations, or with shaky balance sheets, or with earnings in jeopardy.

On the other hand, they should not be eliminated from consideration just because they got caught in the bear market (now in its 16th month). In fact, price drops may have provided a great opportunity to buy good companies with excellent post-recession prospects for a good price and with an unusually high initial yield (one of the three holy grails of dividend investing).

Anyone should do their due diligence to determine whether a company has excellent post-recession prospects, enough cash to consider the current dividend "safe," and a management team determined to raise the dividend when it can. There are lots of lists of dividend stocks out there, but each investor must do his or her own analysis.

If Cramer (I tune him out) said to buy dividend stocks because they'll go down less, that's no reason, ever, to buy any stock.

Feb 15 05:38 PM

[ozcutty2:]

I agree with the comments, some companies are using debt/equity issues, to pay dividends just to save face, how stupid is that!

Some of my stocks pay dividends, PM and AB pay a fair bit. I think they are better than the above picks.

Feb 15 06:40 PM

[socphd71:]

Embarq -- with its almost $6B in debt -- is scheduled to be taken over by Century Telecommunications (CTL). CTL, with an even higher dividend, has a market capitalization of only about 54% of EQ's. Together, their market capitalization will still be less than 10% of Verizon's. Our landline service is provided by EQ; otherwise I have no investment in either.

Feb 15 07:10 PM

[Turnipseed:]

Historically, dividends have been more important than capital gains for portfolio appreciation. It seems likely it will take several years (5+?) to recover from this current mess, so we're not likely to see prolong periods of 10%+ growth in market indices. That means we'll need to be good at picking stocks, and/or rely more on dividends. Just a thougt, I doubt my crystal ball is clearer than anyone elses.

Feb 15 07:33 PM

[Stone Fox C...:]

Dividends are just part of the puzzle. Its been proven over the years that Net Payout Yields that combine stock buybacks with dividends are better then just dividends alone. See my previous article on the subject.

seekingalpha.com/artic...

Feb 15 09:59 PM

[BlueOkie:]

The real question is "You get dividends taxed at 15%, what are you going to do with the money?" Reinvest it, is so how; spend it; pay the taxes with it. (G)

Feb 16 08:47 AM

[User 357819:]

Does anyone have the crystal ball for HTE? BIg dividend now with the stock way down. Cut coming?

Feb 16 09:46 AM

[johnnycanuck:]

User 357819 HTE is not safe as far as dividends go! >38% yield

www.stockchase.com/Com...


MLP's ,and only a select few, is the place to chase dividends IMHO
-agree with the sceptics on the Barrons list- spewing out names like there somebody helps no one.
www.businessweek.com/i...

Feb 16 11:54 AM

[bobbobwhite:]

Posters here have to understand only one thing.....whether you agree or disagree with the writer of any article here doesn't matter to the editors. What matters is page "hits". The more the better for the collective deep pockets daddy of all time....advertisers. That's what keeps these writers writing here, not whether what they say has any value to you.

More people hate Cramer than love him, but he is the most successful player in this biz due to the controversy he creates every time he opens his big mouth, and the viewers and readers he attacts as a result who will look at and perhaps buy their advertised products.

Cramer just loves those walks to the bank with the bags of money GE pays him for doing whatever it is he does, no matter if he does any good for anyone or not. GE doesn't care as long as he makes GE big money. Follow the money, as always, as ever.

Feb 16 12:17 PM

[Burtb:]

On Feb 15 11:09 AM HiSpeed wrote:

> Dividend isn't worth much if the stocks gets cut in 1/2

Actually, the Dividend is worth more when the stock gets cut in half.

If the Company has a good chance of being around in 10 years and still paying a dividend, that is the best time to buy a dividend stock, even if it goes down another 10-20%.

a Dividend investor is trying to buy the stock early, so that the growth and dividend paid on the stock represents the return on investment. If you bought GE 20 years ago, after the 3 splits, you are still earning a nice return on your money. Ditto for PFE, and their 4 splits in the last 20 years. There are many people who believe that GE and PFE will be paying dividends 10 years from now. If you do not think that price of either of these stocks will be worth more in 10 years, do not buy them as a dividend play today. But, if you buy PFE today, and 2-3 years from now, they get back to the $0.32 dividend they are currently paying, you will have an 8-10% return on an investment you do not have to watch anymore.

Feb 16 02:41 PM

[Adam Sharp:]

Let's see... Buy debt-laden stocks with high dividends in a situation where credit will be extremely hard to come by.... What could possibly go wrong?

Feb 16 04:53 PM

[wdcfan:]

I have a friend who told me that the dividends of BAC which I had bought were entirely dependent on the whim of the board. Ha, little did I know that he was right. Buying stock for dividends is a great idea but they can disappear in a heartbeat.

Feb 17 01:02 PM

[Gob:]

I will FIGHT anyone who disagrees with Rachael or denies her beauty.

Feb 18 02:09 AM

[antiquary:]

Dividends reduce your risk. If they're being paid from sources like questionable leverage, or the sale of income-producing property by the company, then of course they raise your risk at the same time they reduce it. In the latter case they're not even a dividend, properly, even if legally they would be; they're a return of capital.

The government of course does tax dividends, but not nearly as highly as it does ordinary income, so that money comes easier to you than the same sum you worked for.

On Feb 15 05:06 AM guliamo wrote:

> What's the deal with dividends anyway?
> As a friend of mine says - Dividends are just a clever way for the
> government to tax you before you sell the stocks.

Feb 25 12:23 PM