Last week the debt crisis in Europe scared investors and forced them to fly to safety in panic. 10-year-treasury price jumped and yield plunged from 4% one month ago to 3.4%, even though April’s job data was as good as March’s. However, unlike stock dividends which may adjust over time to reflect rising prices, bonds leave you at the mercy of inflation. Even iShares Trust iShares Barclays (TIP) offers poor value at this level, with a yield of 3.15%.
The S&P 500 Dividend Aristocrats are companies in the S&P500 index that have increased their dividends every year for at least 25 consecutive years. There are currently 43 companies on the list. In times of uncertainty, which ones are relatively safe?
The following are 15 companies from that list, with a yield greater than 3% and P/E less than 20:
15 High Dividend Companies (Sort by Yield):
Pitney Bowes (PBI)
Cincinnati Financial Corp (CINF)
Eli Lilly (LLY)
Consolidated Edison (ED)
Abbott Laboratories (ABT)
Johnson & Johnson (JNJ)
Coca-Cola Company (KO)
Automatic Data Processing (ADP)
Clorox Company (CLX)
Procter & Gamble (PG)
McGraw-Hill Companies (MHP)
V.F. Corporation (VFC)
Debt/Cash Flow Ratio: the Lower, the Better
There are lots of traditional matrices to measure a company’s financial strength, such as debt/equity ratio. Nonetheless, a more intuitive way is to look at a company’s debt level. Generally speaking, the less debt, the better. For example, Johnson & Johnson’s Debt/Operation Cash Flow (OCF) ratio of 0.9 means (in theory) that JNJ could pay off its debt with 0.9 years of its cash flow.
Cash/Market Cap Ratio: the Higher, the Safer
Health insurers will be the most directly affected by the new legislation because there will be scrutiny and regulation of the healthcare industry. However, big pharmaceutical companies may be able to maintain their profitability due to their substantial lobbying efforts. Many healthcare companies, such as Eli Lilly and Abbott Laboratories, have cash over 10% of their market caps.
Last Thursday Dow’s 1000-point plunge drill provides us with an inside view of what the potential support level might be. For example, the lowest price for Coca-Cola Company was $51.21 at that point. On the other hand, P&G dropped more than 30%, even though it might be erroneous. Nonetheless, you can find out what the worst case scenario in the short term might look like.
8 Main Dividend ETFs
The following are 8 ETFs with net assets over $1 billion and a 12-month-yield over 3%. Please note this list excludes preferred bonds or REIT ETFs and the yield might include a one-time dividend:
Fund Name (Ticker)
Pharmaceutical HOLDRs (PPH)
Vanguard European ETF (VGK)
iShares MSCI Brazil Index (EWZ)
iShares Dow Jones Select Dividend (DVY)
Utilities Select Sector SPDR (XLU)
iShares MSCI Pacific ex-Japan (EPP)
SPDR S&P Dividend (SDY)
iShares MSCI EAFE Value Index (EFV)
China once again lifted banks' reserve requirements to further cool its economy. The EU and IMF’s $1 trillion rescue package reminds us what happened in the U.S. version of the bailout: In Oct 2008 the $700 billion TARP bill was passed. But the stock market didn’t bottom out until March 2009, when the Federal government started to purchase treasury, agency and mortgage-backed securities totaling $1.75 trillion.
With the VIX as high as 40, the stock market could rise and fall significantly over a short period of time. For yield-hungry retail investors, as long as your dividend stocks have the financial strength to weather the storm and maintain (or even increase) the dividends, you should be able to sleep well.
Data are from iShares.com and Yahoo Finance and is valid as of May 9, 2010.
Disclosure: Long JNJ, PPH and TIP