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The Fed is going to keep interest rates near zero for the foreseeable future. With 10 year treasury yields around 3.5%, solid blue chip companies offering decent dividends becomes popular. Not only do they offer current income and the possibility of capital gains, they also have better protection against inflation than regular bonds. No wonder Warren Buffett wrote “Buy American. I Am” article on The New York Times last October. (source: NY Times)

However, the economy is still in the bottoming process. There is a potential risk for the economic to backslide. Which blue chips are relatively safe?

I use following 9 criteria to select relatively safe dividend stocks:

1. Yield>=3.5%

As an alternative to 10-year-treasure, stocks need to have at least that kind of yield.

2. Market Cap >$2 billion

Generally speaking, the bigger, the safer.

3. P/E and Forward P/E both <=20

A company must be profitable to distribute dividends. Investors don’t want to worry about dividend cuts anytime in the near future.

4. PE/Growth<3

Companies need some kind of growth.

5. Price/Sales<5

Earnings might lie, but revenue doesn’t. This is another way to make sure stock is not overpriced.

6. Beta<=1

Beta measures volatility of stock performance relative to the S&P 500. The less volatile, the better.

7. 52-Week-High/Low<1.8

Similar to Beta, companies need to be less volatile than the general market. SPDRs (NYSEARCA:SPY)’s 52-week-high/low ratio is 1.8.

8. Short Ratio<5

A sentiment indicator that is derived by dividing the short interest by the average daily volume for a stock. If an exchange has a high short interest ratio of around five or greater, this can be taken as a bearish signal.

In other words, the less people short this stock, the better.

9. Debt/Operation Cash Flow (CF) <10

This ratio can vary substantially across industries. However, since we are picking “safe” company, a company should not get over its head in debt regardless which industry it is. The less, the safer.

There are total 33 companies meet these criteria. The following 10 were introduced in:

Name
Symbol
AMER ELECTRIC POW CO
(NYSE:AEP)
BRISTOL-MYERS SQUIBB
(NYSE:BMY)
DOMINION RES NEW
(NYSE:D)
HEINZ H J CO
(NYSE:HNZ)
ALTRIA GROUP INC
(NYSE:MO)
PHILIP MORRIS INTL
(NYSE:PM)
PPL CORP
(NYSE:PPL)
REYNOLDS AMERICAN
(NYSE:RAI)
SOUTHERN CO
(NYSE:SO)
VERIZON COMMUN
(NYSE:VZ)

The 23 new stocks I found are presented below, with their fundamental data ( sorted by Debt/Cash Flow):

Name
Symbol
P/E
Forward P/E
PEG Ratio
Yield
Debt/CF
BP PLC
(NYSE:BP)
14.3
9.3
2.2
6.2%
1.1
Partner Communications
(NASDAQ:PTNR)
10.6
9.6
1.4
6.0%
1.1
SYSCO CP
(NYSE:SYY)
14.1
13.0
1.3
3.8%
1.6
EXELON CORPORATION
(NYSE:EXC)
11.9
12.4
2.7
4.2%
1.6
MCDONALDS CP
(NYSE:MCD)
15.2
13.4
1.6
3.6%
1.9
KIMBERLY CLARK CP
(NYSE:KMB)
14.6
11.7
1.5
4.1%
1.9
CELLCOM ISRAEL
(NYSE:CEL)
10.5
2.7
1.0
10.4%
2.1
ABBOTT LABORATORIES
(NYSE:ABT)
13.8
11.6
1.1
3.5%
2.3
ATMOS ENERGY CP
(NYSE:ATO)
12.4
12.9
2.7
4.7%
2.8
OGE ENERGY CP
(NYSE:OGE)
12.5
11.4
2.8
4.3%
3.2
ENTERGY CP
(NYSE:ETR)
14.2
11.5
1.4
3.7%
3.4
AGL RESOURCES INC
(AGL)
9.6
12.1
2.9
4.9%
3.5
PUB ENTRPR GP
(NYSE:PEG)
9.7
9.8
1.9
4.3%
3.5
NATIONAL GRID PLC
(NYSE:NGG)
15.4
11.6
1.9
7.0%
1.7
XCEL ENERGY INC
(NYSE:XEL)
13.1
12.1
2.0
5.0%
4.4
KRAFT FOODS INC
(KFT)
12.9
12.4
1.6
4.4%
4.5
F P L GROUP INC
11.5
11.4
1.3
3.5%
5.0
DIAGEO PLC ADS NEW
(NYSE:DEO)
14.4
13.4
1.7
4.6%
5.4
PG&E CP
(NYSE:PCG)
10.7
12.2
1.9
4.1%
5.5
NORTHEAST UTIL
(NYSE:NU)
12.0
12.1
1.5
4.0%
6.3
ENBRIDGE INC
(NYSE:ENB)
10.8
15.1
1.6
3.5%
6.5
SCANA CP NEW
(NYSE:SCG)
12.0
11.5
2.8
5.3%
8.9
CENTERPOINT ENERGY
(NYSE:CNP)
11.3
10.2
0.6
6.1%
10.0

The following charts show the top 6 companies’ last 20 years’ dividends histories. The charts for Partner Communications Co (PTNR) and Cellcom Israel (CEL) are not presented because they have a short history as U.S public companies.

McDonald's Corp.’s 2009 dividends so far was $1.5:

Kimberly-Clark Corporation: excluding a special dividend of $1.07 in Dec 2004.

Abbott Laboratories: excluding a special dividend of $2.86 in May 2004.

These are pretty solid companies overall, even though each of them has its own issues and involves its own risks. Many of these stocks have been left behind in the latest run for the last 6 months. For example, ABBOTT LABORATORIES only recovered 15% from its low.

Disclosure: I have long position on SPY and MCD. All data is from Yahoo Finance as of Sep 25, 2009.

Source: Which Dividend Stocks Are Relatively Safe?