34 Safe Dividend Stocks; 9 Criteria to Select Them

By Hao Jin

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 become 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.” in The New York Times last October.

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 Treasury, 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 don’t. This is another way to make sure a 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
This is 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” companies, a company should not get over its head in debt regardless of which industry it is. The less debt, the safer the company.

There are total 33 companies meet these criteria. The following 10 were introduced in my Sep 3’s article:

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

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

Click to enlarge:

McDonald's Corp. (MCD)’s 2009 dividends so far was $1.50: (Click to enlarge)

Kimberly-Clark Corporation (KMB): excluding a special dividend of $1.07 in Dec 2004. (Click to enlarge)

Abbott Laboratories (ABT): excluding a special dividend of $2.86 in May 2004. (Click to enlarge)

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 Labs only recovered 15% over its low.

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

Original article

Comments

[stink726:]

Interesting article; thanks.

Oct 02 01:47 PM

[mbkelly75:]

Another nice article with food for thought. Some of these stocks I have owned for several decades and some I would not want to own right now anyway. Your choices for criteria are interesting. I use PEG rather than PE by itself and Forward PE's seem to involve wishful thinking sometimes rather than facts. I prefer P/S to even the PEG though. P/S is real cash coming in and is not nearly as easy to massage as Earnings are. (Enron, anyone???). I tend to re-invest the dividends (only taking the cash if I need it in the budget) and I have found that >3% for stocks and >5% for MLPs and REITs works well for me. The Golden Ratio for stocks (the level that gives the best return while still allowing the company to grow) ranges from 3.1% to 3.8% so better than 3% works for me over the long-term. I also look at the Moving Averages. If a stock is trending down - it is not a good time to buy. If it is trending up - that works for me. The ideal time to buy is right after a Golden Cross (the 20 Day MA crosses the 200 Day MA on the way UP). I tend to bottom-fish before I buy a stock - I look for the deals - as Graham made famous so many years ago with Buffet and others contributing. Some outstanding screens and information on this are here:
grahaminvestor.com/

Petroski Scores and Altman Z scores are outstanding for judging financial strength also. Looking at the Quick Ratio gives a fast look at a company's financial strength and is easily screened by looking for >1. Another way to judge Debt is called the "Financial Leverage Ratio". This is Total Assets divided by Book Value. A ratio of 1.0 = Zero (0) Debt, <2 = Very Low Debt, 9 = VERY High Debt - stick with <5 as 5 is the average ratio of the S&P 500. This ratio does not apply to Banks, Saving and Loans or any other business where high debt is the business.

Oct 29 02:39 PM