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By Siraj Sarwar

High-dividend stocks, in today's low-interest rate environment, are able to easily outperform government bonds. Retirees and other investors seek higher returns; therefore, they eagerly seek such investments. In this article, I review four stocks that are suitable for those seeking the benefits of high dividends combined with the safety of good income statements and strong cash flows and balance sheets that can support both share price appreciation and adequately cover such dividends.

STX Dividend Chart

STX Dividend data by YCharts

Seagate Technology PLC (NASDAQ:STX) is a provider of electronic data storage products. At present, Seagate offers a quarterly dividend of $0.38 cents/share. For the full year of 2012, the company paid a dividend of $1.52 per share, yielding at 5%. In the last year alone, it was able to increase dividends by 52%. As shown in the chart above, in the past five years, it was able to enlarge dividends by 216%.

How dividends are safe

TTM

2012

2011

2010

Revenue

$16,332

$14,939

$10,971

$11,395

Operating Income

$3,446

$3,108

$806

$1,740

Net Income

$3,233

$2,862

$511

$1,609

EPS

$7.70

$6.49

$1.09

$3.14

Morningstar.com [Revenue and Income in millions]

In the past two years, the company has shown strong revenue and earnings growth. In the past three years, Seagate was able to increase its revenue by 15.1% while the industry average stood at 5.9%. In addition, over the past two years, amazingly, the company has been able to enlarge its margins. In the Trailing Twelve Months [TTM], its operating and net margins stood at 21.1% and 19.8% respectively. With a strong increase in revenue and margins, in the TTM, it has generated Earnings Per Share [EPS] of $7.70.

TTM

2012

2011

2010

Operating cash flow

$4,359

$3,262

$1,264

$1,932

Capital expenditure

($702)

-$636

-$843

-$639

Free cash flow

$3,657

$2,626

$421

$1,293

Morningstar.com [Figures in millions]

In the past two years, the company has shown exceptional growth in its cash flows. At the end of 2012, it was able to stretch its cash flows to $3,262 million, representing an increase of $1,998 million. In addition, in the TTM, its free cash flows stood at $3,657 million while its dividend payments accounted for only $595 million, indicating its ability to increase dividends. As another indication of its strong cash flows, in the TTM, its payout ratio stood at only 19.8% providing a lot of ability to increase dividends.

CA, Inc. (NASDAQ:CA) is an independent enterprise information technology software and service company. It develops and delivers software and services that help organizations manage and secure their IT infrastructures and deliver more flexible IT services. At present, CA offers a quarterly dividend of $0.25 cents/share. For the full year of 2012, it has provided a dividend of $1 per share, yielding at 4.55%. Recently, it increased its annual dividend fivefold to $1 a share.

How dividends are safe

2012

2011

2010

Revenue

$4,814

$4,429

$4,353

Operating Income

$1,389

$1,254

$1,247

Net Income

$951

$827

$771

EPS

$1.93

$1.61

$1.47

Morningstar.com [Revenue and Income in millions]

The company has had a solid income statement over the past three years. It has been consistently able to increase revenue and earnings. In the past three years, on average, its revenue growth stood at 4.1%. It also has high margins on sales. In the TTM, its net margin stood at 19.7%. With strong revenue growth and solid margins, in the past three years, its EPS growth stood at 1.4%.

Furthermore, CA has been consistently able to generate strong cash flows. At the end of 2012, its free cash flows were standing at $1,226 million while dividend payments stood at only $192 million. The company has substantial free cash flows to increase dividends. With hefty free cash flows, the company is also working on a share repurchase program. CA looks like a safe pick for dividend investors with a solid financial position. With the following few metrics, its financial health also seems to be at an attractive position to support dividends.

Current Ratio 1.14

Quick Ratio 1.0

Debt/Equity 0.24

Duke Energy Corporation (NYSE:DUK) is an energy company. At present, Duke Energy offers one of the best quarterly dividends of $0.76 cents. For the full year of 2012, it has paid dividends of $3.03 per share. Duke Energy has a long history of consistently increasing dividends.

Years

Dividend

2012

$3.03

2010

$2.97

2009

$2.91

2008

$2.82

2007

$2.70

Morningstar.com

How Dividends are safe

In Millions

2012

2010

2010

Revenue

$19,624

$14,529

$14,272

Operating Income

$3,110

$2,777

$2,461

Net Income

$1,768

$1,706

$1,320

Earnings Per Share

$3.07

$3.84

$3.00

Morningstar.com

The company has shown exceptional growth both in revenues and earnings. Since 2010, the company has been able to expand its revenue by $5,352 million. In the past three years alone, on average, it has been able to increase revenue by 15.5%. In addition, it has been able to increase earnings year-over-year. On the negative side, its margins condensed in the past three years. However, in the past three years, it has still been able to increase Earnings Per Share [EPS] by 7.2%.

In Millions

2010

2011

2012

Operating cash flow

$4,511

$3,672

$5,244

Capital expenditure

($4,817)

($4,372)

($5,501)

Free cash flow

($306)

($700)

($257)

Morningstar.com

At present, Duke Energy has solid cash flows. The company's operating cash flows have shown strong growth over the last year. At the end of 2012, its operating cash flows stood at $5,244 million, representing an increase of $1,572 million. On the other hand, it is investing heavily in growth opportunities. At the end of 2012, its capital expenditure stood at $5,501 million.

Recently, Duke Energy completed a merger with Progress Energy. This merger with Progress Energy has already started providing returns for the company. In addition, it also made considerable progress with its fleet modernization program by bringing online three major new power plants in North Carolina, enabling it to retire older, less efficient coal-fired units.

Even with such a high capital expenditure, the company was able to increase its dividends year over year. I believe it can be a safe pick for dividend investors with strong revenue and earnings growth. In addition, the company has shown a strong investment strategy, which can enable it to generate strong cash flows in the future.

Vectren Corporation (NYSE:VVC) provides gas and electricity to customers in adjoining service territories that cover nearly two-thirds of Indiana, and west central Ohio. Vectren is one the stable dividend payers over the years. Currently, the company offers a quarterly dividend of 0.355 cents/share. Below is a brief history of consistently increasing dividends.

Year

Dividend

2012

$1.405

2010

$1.385

2009

$1.365

2008

$1.345

2007

$1.31

Morningstar.com

Together with strong dividends, in the last year alone, its stock grew by nearly 36.44%. Its solid returns are strongly backed by its financial position. Over the years, the company has been able to enlarge earnings and cash flows. It has solid margin in its sales; though, in the ttm, its operating and net margin stands at 15.8% and 7.1%. With strong margins, the company was able to enlarge EPS by 5.8%. The table below demonstrates its ability to consistently increase its dividend.

For the full year of 2012, it reported consolidated earnings per share of $1.94 beating the guidance range of $1.80-$1.90 per share. Its Utility Group and Infrastructure Services business delivered solid results, which led it to beat guidance. With the solid foundation established by its core utility operations, together with strong demand of Infrastructure Services, the company is well positioned to continue to generate increasing returns.

Source: 4 Stocks For Solid Dividends