Seeking Alpha

Which Dividend Stocks Are Relatively Safe? 29 comments

by: Hao Jin September 27, 2009 | about: ABT / AEP / AGL / ATO / BMY / BP / CEL / CNP / D / DEO / ENB / ETR / EXC / FPL / HNZ / KFT / KMB / MCD / MO / NGG / NU / OGE / PCG / PEG / PM / PPL / PTNR / RAI / SCG / SO / SPY / SYY / VZ / XEL    
About this author:
Submit
an article to

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 (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
(AEP)
BRISTOL-MYERS SQUIBB
(BMY)
DOMINION RES NEW
(D)
HEINZ H J CO
(HNZ)
ALTRIA GROUP INC
(MO)
PHILIP MORRIS INTL
(PM)
PPL CORP
(PPL)
REYNOLDS AMERICAN
(RAI)
SOUTHERN CO
(SO)
VERIZON COMMUN
(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
(BP)
14.3
9.3
2.2
6.2%
1.1
Partner Communications
10.6
9.6
1.4
6.0%
1.1
SYSCO CP
(SYY)
14.1
13.0
1.3
3.8%
1.6
EXELON CORPORATION
(EXC)
11.9
12.4
2.7
4.2%
1.6
MCDONALDS CP
(MCD)
15.2
13.4
1.6
3.6%
1.9
KIMBERLY CLARK CP
(KMB)
14.6
11.7
1.5
4.1%
1.9
CELLCOM ISRAEL
(CEL)
10.5
2.7
1.0
10.4%
2.1
ABBOTT LABORATORIES
(ABT)
13.8
11.6
1.1
3.5%
2.3
ATMOS ENERGY CP
(ATO)
12.4
12.9
2.7
4.7%
2.8
OGE ENERGY CP
(OGE)
12.5
11.4
2.8
4.3%
3.2
ENTERGY CP
(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
(PEG)
9.7
9.8
1.9
4.3%
3.5
NATIONAL GRID PLC
(NGG)
15.4
11.6
1.9
7.0%
1.7
XCEL ENERGY INC
(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
(FPL)
11.5
11.4
1.3
3.5%
5.0
DIAGEO PLC ADS NEW
(DEO)
14.4
13.4
1.7
4.6%
5.4
PG&E CP
(PCG)
10.7
12.2
1.9
4.1%
5.5
NORTHEAST UTIL
(NU)
12.0
12.1
1.5
4.0%
6.3
ENBRIDGE INC
(ENB)
10.8
15.1
1.6
3.5%
6.5
SCANA CP NEW
(SCG)
12.0
11.5
2.8
5.3%
8.9
CENTERPOINT ENERGY
(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.

Related Articles
Print this article with comments
Comments
29
Older > Comments 1 - 20 out of 29
You are viewing the latest 20 comments
  •  
    Unless it has been overlooked, dividend growth does not appear to be one of your determinative criteria. Without historical dividend growth, wouldn't higher cash flow be found in preferred stocks?

    However I appreciate your work and extend my thanks.
    Sep 27 06:58 PM | Link | Reply
  •  
    you were the last comment here when I checked this article and dividend growth was my first criteria, so I am surprised it was not included.


    On Sep 27 06:58 PM User 468561 wrote:

    > Unless it has been overlooked, dividend growth does not appear to
    > be one of your determinative criteria. Without historical dividend
    > growth, wouldn't higher cash flow be found in preferred stocks?<br/>
    >
    > However I appreciate your work and extend my thanks.
    Sep 27 08:45 PM | Link | Reply
  •  
    Nice work, I like your choices.

    KFT will be interesting with the potential Cadbury deal and I always question the tobacco group because of the target on that industry.
    Sep 28 12:21 AM | Link | Reply
  •  
    Not a good idea to buy KFT right away, wait till the M&A thingy is over before jumping in.

    The first 10 stocks are great selection, the next list contains too many energy stocks.
    Sep 28 03:58 AM | Link | Reply
  •  
    NYSE highest dividend yielding stocks top 100:

    www.TopYields.nl/Top_d...
    Sep 28 11:01 AM | Link | Reply
  •  
    Terrific Article ! I especially like the dividend history charts - very valuable.

    I like your "new list" (the second list) of 23 stocks.

    I would like to point out, in the 23 stock list - over half are UTILITIES. Utilities are steady, reliable dividend payors. While these are good, safe dividend stocks, proper diversification says that if one formed a portfolio consisting of your 23 picks, then utilities would be seriously overweighted.
    Sep 28 03:52 PM | Link | Reply
  •  
    Adoptsalot - Because you get a full credit for all foreign taxes paid. This is a non issue.


    On Sep 27 05:26 PM Adoptsalot wrote:

    > Also, don't overlook that foreign stocks like CEL will have a (in
    > addition to US tax) foreign tax attached to them, reducing your
    > dividend yield and selling profit- and, if there was a problem, you
    > would be a day late or at least 6-7 hours before you even knew about
    > it.
    Sep 28 03:53 PM | Link | Reply
  •  
    I agree. KFT was once a promising steady dividend stock, but who knows if they will have to cut the dividend to pay for the acquistion. This is precisely what happened to PFE. Too bad - KFT was looking good before this. I dont know why KFT has to merge or acquire. Bigger is not necessarily better.


    On Sep 28 03:58 AM Ryu Mei Co wrote:

    > Not a good idea to buy KFT right away, wait till the M&amp;A thingy
    > is over before jumping in.
    >
    > The first 10 stocks are great selection, the next list contains too
    > many energy stocks.
    Sep 28 03:56 PM | Link | Reply
  •  
    Hao -

    You have come up with a fine list. I do not 100% agree with your selection criteria. You have included many factors like Beta, that don't make a bit of difference in terms of "dividend safety"

    What about factors like the old standby: "dividend coverage ratio" ?
    Sep 28 03:59 PM | Link | Reply
  •  
    What about stocks like DPO? The dividends don't rise but they have been a solid performer as a dividend income stock $.167 for years. Is it better to have large amounts of this stock that is currently in a yield of 13.25% or to re-invest into escalating dividends that double approximately every 5-8 years?

    Regards,

    Butch
    Sep 29 08:43 AM | Link | Reply
  •  
    True, but customer service/relations puts VZ over the top for me.


    On Sep 27 03:22 PM buoy wrote:

    > VZ and T could almost be identical twins.
    Sep 29 12:04 PM | Link | Reply
  •  
    "The Fed is going to keep interest rates near zero for the foreseeable future. With 10 year treasury yields around 3.5%"

    As long as the first sentence in the article remains true, Your best dividend plays are the Agency Mortgage REITs such as AGNC, CMO, HTS, and NLY. All they need is low short term interest rates and an upward sloping yield curve.
    Sep 29 03:51 PM | Link | Reply
  •  
    Thanks everyone for great ideas and thoughts. I will try to respond to your questions in next week’s article/instablog, if they are not already answered by our knowledgeable readers.


    On Sep 27 06:58 PM User 468561 wrote:

    > Unless it has been overlooked, dividend growth does not appear to
    > be one of your determinative criteria. Without historical dividend
    > growth, wouldn't higher cash flow be found in preferred stocks?<br/>
    >
    > However I appreciate your work and extend my thanks.
    Sep 29 06:17 PM | Link | Reply
  •  
    DPO is not a stock and does not pay dividends. 80% of its payout is return of capital. Better do more homework:
    www.cefconnect.com:80/...


    On Sep 29 08:43 AM Butch Weber wrote:

    > What about stocks like DPO? The dividends don't rise but they have
    > been a solid performer as a dividend income stock $.167 for years.
    > Is it better to have large amounts of this stock that is currently
    > in a yield of 13.25% or to re-invest into escalating dividends that
    > double approximately every 5-8 years?
    >
    > Regards,
    >
    > Butch
    Sep 30 02:56 AM | Link | Reply
  •  
    I wasn't aware that DPO doesn't pay dividends. My account in State Street shows them as Dividends. If it is a distribution 80% of capital, are you saying it is a 20% equity fund? As for doing more homework, I see that I will have to now since I rely on this income whether it be dividend or not. Still I ask the same question, is it better to have large amounts of this DPO Fund or re-invest into escalating dividend stocks that double approximately every 5-8 years?

    Regards,

    Butch

    p.s. Thanks for the link, I'll be studying it for awhile.
    Sep 30 08:16 AM | Link | Reply
  •  
    Ned Davis Research points out that between 1972 and 2008 - stocks that paid a rising dividend averaged a 8.9% return against the S&Ps 6,2% return. Dividend stocks that paid a steady return did just a little better the S&P with a 6.3% return. So - yes - stocks that pay a RISING dividend do much better than the regular stocks. That difference is HUGE over the long term - especially when re-investing dividends - which is not in these figures.
    Sep 30 11:27 AM | Link | Reply
  •  
    And targets of cap and tax...


    On Sep 28 03:52 PM Living4Dividends wrote:

    > Terrific Article ! I especially like the dividend history charts
    > - very valuable.
    >
    > I like your "new list" (the second list) of 23 stocks.
    >
    > I would like to point out, in the 23 stock list - over half are UTILITIES.
    > Utilities are steady, reliable dividend payors. While these are good,
    > safe dividend stocks, proper diversification says that if one formed
    > a portfolio consisting of your 23 picks, then utilities would be
    > seriously overweighted.
    Sep 30 11:52 PM | Link | Reply
  •  


    Amen
    On Sep 28 03:59 PM Living4Dividends wrote:

    > Hao -
    >
    > You have come up with a fine list. I do not 100% agree with your
    > selection criteria. You have included many factors like Beta, that
    > don't make a bit of difference in terms of "dividend safety"
    >
    > What about factors like the old standby: "dividend coverage ratio"
    > ?
    Sep 30 11:53 PM | Link | Reply
  •  
    "too many energy stocks" is an oxymoron.


    On Sep 28 03:56 PM Living4Dividends wrote:

    > I agree. KFT was once a promising steady dividend stock, but who
    > knows if they will have to cut the dividend to pay for the acquistion.
    > This is precisely what happened to PFE. Too bad - KFT was looking
    > good before this. I dont know why KFT has to merge or acquire. Bigger
    > is not necessarily better.
    Sep 30 11:54 PM | Link | Reply
  •  
    Sysco is a great company to consider as a long-term purchase, it has a strong balance sheet and operates in a conservative sector. It provides a relatively healthy dividend yield and dividends that the company has been raising for a many years now.

    Another good dividend stock to look at is Caterpillar (CAT). It's one of the largest manufacturers of construction equipment and is benefiting from the increase in government expenditures around the world, a lot of which are being directed towards infrastructure development! It also sports a very good dividend yield right now, will get even better if purchased at a slight dip that should be coming up.

    For more analysis, check out my blog: youngandinvested.com
    Oct 01 03:35 PM | Link | Reply
Viewing Comments 1-20 out of 29 Older comments >
Related Themes:
  1. Trading Ideas (22 in last week)
  2. Dividends (23 in last week)
  3. Bonds (55 in last week)
  4. Dollar/Currencies (109 in last week)
  5. Earnings (47 in last week)
More by Hao Jin
Other articles by Hao Jin »
Find People on SA