29 Stocks with Sustainable Dividends

The financial crisis has been tough not only for stock prices but also for dividends as well. Some former dividend darlings in the financial sector have seen their dividends being cut or eliminated after taking in billions in TARP aid due to severe losses from complex financial instruments. As a result the ratio of dividend increases to dividend cutters has been hovering at almost even for both. This means that so far in 2009, there is roughly one dividend cutter for every dividend raiser. Over the past 5 years this ratio has been more like 6 to 1 in favor of the dividend growers.

Due to the horrifying statistics of the overall bleak dividend picture, some reporters are claiming that dividend investing is dead. Just because you read it in the paper however, doesn’t mean it is true for everybody. While the overall statistics have been rather scary, the negative dividend news has been concentrated in the financial sector. Thus a well- diversified portfolio of income stocks should have performed well even during crisis.

Broad statistics on dividends could be misleading however as they focus on all companies, not just on the ones which have a proven track record of raising dividends. Even if the sky truly is falling down, there still are companies, which are generating enough cash flows and are confident enough in their business to increase distributions. In fact the dividend aristocrats index with its 52 components has seen 8 dividend cuts, one buyout and 32 dividend increases so far in 2009.

In addition to that, most dividend growth strategies tend to evaluate sustainability of dividends on a per issue basis, thus weeding out companies whose dividends are in peril. It really is a no brainer that a company, which generates enough earnings to cover dividend payments by a factor of 2 or 3, is much less likely to cut or eliminate distributions compared to a company, which pays out almost all of its cash flows out as dividends. This simple formula does exclude certain vehicles such as REITs for example, which are required to distribute almost all of their earnings as distributions to shareholders in order to maintain their tax status. Thus, these vehicles (such as REITs) should be evaluated using other criteria, which I would describe in a future post.

I have selected several prominent dividend growth stocks, whose earnings and cash flows provide adequate coverage for their dividends:

Symbol	Name	Industry	Dividend Yield	P/E	Dividend Payout Ratio	2008 EPS	Last Trade
ABT	Abbott Laboratories	Health Care	3.60%	14.64	53%	$ 3.03	$44.36
ADM	Archer-Daniels-Midland	Consumer Staples	2.00%	10.52	21%	$ 2.65	$27.87
ADP	Automatic Data Proc	Information Technology	3.40%	14.63	50%	$ 2.63	$38.48
AFL	AFLAC Inc	Financials	2.70%	16.05	43%	$ 2.62	$42.06
APD	Air Products & Chem	Materials	2.40%	14.95	36%	$ 4.97	$74.31
BCR	Bard (C.R.)	Health Care	0.90%	18.13	17%	$ 4.06	$73.62
BDX	Becton, Dickinson	Health Care	2.00%	15.02	30%	$ 4.42	$66.39
CB	Chubb Corp	Financials	2.90%	9.91	28%	$ 4.92	$48.76
CLX	Clorox Co	Consumer Staples	3.50%	15.14	52%	$ 3.81	$57.68
DOV	Dover Corp	Industrials	3.00%	9.34	28%	$ 3.67	$34.26
EMR	Emerson Electric	Industrials	3.80%	11.32	42%	$ 3.11	$35.19
FDO	Family Dollar Stores	Consumer Discretionary	1.80%	17.68	33%	$ 1.66	$29.35
GWW	Grainger (W.W.)	Industrials	2.10%	14.36	30%	$ 6.04	$86.71
JNJ	Johnson & Johnson	Health Care	3.30%	13.15	43%	$ 4.57	$60.08
LOW	Lowe's Cos	Consumer Discretionary	1.60%	15.32	24%	$ 1.49	$22.83
MCD	McDonald's Corp	Consumer Discretionary	3.60%	14.70	53%	$ 3.76	$55.27
MHP	McGraw-Hill Companies	Consumer Discretionary	3.10%	11.39	36%	$ 2.51	$28.60
MMM	3M Co	Industrials	2.90%	14.58	42%	$ 4.89	$71.32
NUE	Nucor Corporation	Basic Materials	3.00%	7.82	23%	$ 5.98	$46.79
PG	Procter & Gamble	Consumer Staples	3.40%	14.63	49%	$ 3.58	$52.37
SHW	Sherwin-Williams	Consumer Discretionary	2.30%	15.12	36%	$ 4.00	$60.46
SIAL	Sigma-Aldrich	Materials	1.10%	19.46	22%	$ 2.65	$51.56
STR	Questar Corp	Utilities	1.50%	8.64	13%	$ 3.88	$33.53
SWK	Stanley Works	Consumer Discretionary	3.20%	14.55	47%	$ 2.82	$41.03
TGT	Target Corp	Consumer Discretionary	1.60%	14.70	24%	$ 2.86	$42.03
VFC	VF Corp	Consumer Discretionary	3.60%	12.11	44%	$ 5.42	$65.63
WAG	Walgreen Co	Consumer Staples	1.70%	14.57	25%	$ 2.17	$31.62
WMT	Wal-Mart Stores	Consumer Staples	2.10%	15.46	33%	$ 3.35	$51.79
XOM	Exxon Mobil	Energy	2.50%	7.85	19%	$ 8.69	$68.21
		Average	2.57%	13.65	34.36%

Open as a spreadsheet

Investors should be cautioned that entry price does matter. Thus this list should only be considered as a starting point in the process of analyzing potential dividend stock candidates. Chances are that a dividend growth stock that manages to grow earnings is a likely candidate to continue growing distributions, which will increase yield on cost over time.

Full Disclosure: Long ABT, ADM, ADP, AFL, APD, CLX, EMR, FDO, GW, JNJ, MCD, MHP, MMM, NUE, PG, SHW, WMT

Comments

[notsosmart:]

crummy yields.

Aug 20 11:09 AM

[TLassen:]

thank you excellent work.

in evaluation a company's ability to sustain it's dividends, should we not compare against 2009 EPS (as estimated by the company itself)
ex ABT EPS 2009 est 3.65-3.70, current div 1.60, P-Ratio: 43%

Aug 20 12:26 PM

[TLassen:]

notsosmart,
the old yield is crummy....

as author states above "Investors should be cautioned that entry price does matter. Thus this list should only be considered as a starting point in the process of analyzing potential dividend stock candidates. Chances are that a dividend growth stock that manages to grow earnings is a likely candidate to continue growing distributions, which will increase yield on cost over time"

The yield is a function of price. Key is to find a company that can sustain it's dividends, increases it's dividends, and then look for a suitable entry point. Just a friendly suggestion, buy the company you select per above criteria at the price where it's div yield is larger than the current 10 yr bond yield.




On Aug 20 11:09 AM notsosmart wrote:

> crummy yields.

Aug 20 12:35 PM

[whidbey:]

This kind of recommendation must be carefully guarded against. No one knows what is sustainable in another down turn, and the probability of that is high.

The S&P 500 has gone beyond just discounting the end of the downturn but is now embedding a 4.0% real GDP growth rate for the coming year. That is pure insanity, if it is not them worry about inflation instead.

Aug 20 12:48 PM

[TLassen:]

Whidbey,
Granted....investing always involves an element of risk. That's exaclty why comparing the div payout ratio against forward looking EPS (as estimated by the company itself) adds some visibility on the risk of the dividends getting cut.
I will give you an example (although not an Aristocrat company)
CAT: company estimated EPS 09 is for 1.25, current dividends 1.65. regardless of dividend yield, CAT may not be able to sustain it's current dividends.
DD required anytime you invest, SA is for exchanging viewpoints, so we can learn form each other.

On Aug 20 12:48 PM whidbey wrote:

> This kind of recommendation must be carefully guarded against. No
> one knows what is sustainable in another down turn, and the probability
> of that is high.
>
> The S&P 500 has gone beyond just discounting the end of the downturn
> but is now embedding a 4.0% real GDP growth rate for the coming year.
> That is pure insanity, if it is not them worry about inflation instead.

Aug 20 02:11 PM

[drone:]

With a payout ratio and PE like that, XOM needs to increase its dividend yield substantially before I will invest.

Aug 21 04:23 AM

[YoYoMama:]

Agreed. If the yield is not better than my igobanking account (about 3%), I don't bother. There are plenty of dividend increasers over 5%.

On Aug 20 11:09 AM notsosmart wrote:

> crummy yields.

Aug 21 08:56 AM

[David Van K...:]

Good article, nice research.

The article focused on sustainability of dividends. That's just one of the four "holy grails" of a sound dividend investing strategy: favorable valuation at time of purchase; acceptable initial yield; propensity of the company to raise its dividend annually; and safety of the dividend.

A dividend-growth strategy is significantly different from a capital-appreciation strategy. It is a slow, steady approach to profiting from the stock market. Once the dividend investor satisfies the initial requirements (favorable valuation and acceptable initial yield), you must keep your eye on the ball: increasing dividend flow. Check your holdings periodically to be sure that they are in no financial difficulty that would either threaten the dividend or stall the company from raising it every year. Those rising dividends increase your personal yield ("yield on cost") every year. I like my personal yield to reach 10% within 10 years of purchase.

As to initial yield, my current requirement is 3%. I will accept 2.5% from a company that has raised its dividend for 20 consecutive years.

Aug 21 10:22 AM

[Living4Divi...:]

Even if you pick out the high yielders, Most of these yield less than the SP500. Crummy yields is right.

The counter argument is "yield on cost" Well, right now, the yield on cost is not looking to good.

Aug 21 11:04 AM

[Dividend Di...:]

Shouldn't the growth rate be the justification for accepting an initial yield lower than 3% rather than historical increases? Referencing your 10x10 article, in order to hit the "sweet spot", yield and growth are your key factors, no? If you have a history of increases, but recent growth slows, aren't you better off in an investment with better "sweet spot" potential (growth over historical increases)?


On Aug 21 10:22 AM David Van Knapp wrote:

> Good article, nice research.
>
> The article focused on sustainability of dividends. That's just one
> of the four "holy grails" of a sound dividend investing strategy:
> favorable valuation at time of purchase; acceptable initial yield;
> propensity of the company to raise its dividend annually; and safety
> of the dividend.
>
> A dividend-growth strategy is significantly different from a capital-appreciation
> strategy. It is a slow, steady approach to profiting from the stock
> market. Once the dividend investor satisfies the initial requirements
> (favorable valuation and acceptable initial yield), you must keep
> your eye on the ball: increasing dividend flow. Check your holdings
> periodically to be sure that they are in no financial difficulty
> that would either threaten the dividend or stall the company from
> raising it every year. Those rising dividends increase your personal
> yield ("yield on cost") every year. I like my personal yield to reach
> 10% within 10 years of purchase.
>
> As to initial yield, my current requirement is 3%. I will accept
> 2.5% from a company that has raised its dividend for 20 consecutive
> years.

Aug 21 05:19 PM