Marty Whitman describes his strategy by stating that he invests in companies that are “safe and cheap." The following 20 dividend stocks were chosen for their large yields and for the safety of their core businesses, which make most on this list "safe and cheap." Emphasis on valuation is made for capital protection and appreciation over time -- we want to buy businesses that will be around in 20 years and look to earnings quality and business moat.
Many investors get lulled into a false sense of security with high yield stocks, even when the underlying companies have to borrow money to fund their dividend payments. Look for large operating cash flows to cover the dividend payments during recessions and in times of deep competitive pressures.
AHT -- Ashford Hospitality Trust is a REIT which carries a 5% yield, trading at 56% of book value. AHT operates hotel chains and makes bridge loans. Ashford has strong management and historical returns to shareholders. Now that travel is back, AHT should benefit from increased lodging revenue as it passes through to their loan portfolio. Additionally, AHT has been adept at selling overvalued property and buying undervalued property over the years. Price to cash flow here is very reasonable at around 5X TTM cash flows.
MCD – McDonald's has a forward dividend yield of 3.3% and an 8%-10% historical earnings growth rate. MCD is a stalwart company which maintains an impressive 20% net profit margin. At a 14.5X forward PE, MCD is not overly undervalued based on next year's earnings but is cheap on operating cash flow and franchise/brand value. MCD will be around in 20 years, which makes the 3% yield much safer than for many of the stocks in the market and several names on this list. Covered calls are a good way to play this stock.
PEP – PepsiCo offers a nearly 3% dividend yield and, like MCD, is a stalwart name that will be around in 20 years (that is, if people are still thirsty and if the Mayans and Nostradamus are wrong). PEP has strong brand names in Frito Lay and a global focus which helps diversify its customer base. At 14X forward earnings, PEP is fairly cheap, although trends in net tangible assets should be watched going forward as well as competitive pressures.
TEF – Telefonica is a lower moat (my opinion) telecom stock with a 6% yield. The company trades at 7X trailing 12 month earnings but 14X forward earnings. TEF has strong operating cash flows and trades for under 10X free cash flow. Although the business is more speculative than PEP or MCD, the discount and yield make this one to watch as earnings may stay at higher levels going forward and free cash flow looks to be strong here.
TOT – Total is one of the largest oil integrated oil companies in the world, but it's based in Spain which has kept the stock remarkably cheap this past year. With a 4.7% forward dividend yield and an 8X forward PE multiple, Total is a bargain as long as oil prices don’t crash in the near future. TOT sports a 4X EV EBITDA multiple and a 9X trailing PE.
JNJ – Johnson & Johnson is making a lot of mistakes, but as long as people scrape their knees and use shampoo, JNJ will be printing profits regardless of the current round of mistakes and negative headlines. JNJ has a 3.5% forward dividend yield and a 12X PE multiple. EV/EBITDA of 8X suggests JNJ is pretty cheap here, especially after missing the fall rally. The fumbles need to end, but the cash flow is the bigger issue for stock investors.
MSFT – Microsoft is raising its yield to 2.2% or more and trades for 10X earnings. Although not a huge yield, selling at the money call options can produce a 20% per year income stream and hedge your position against loss.
INTC – Intel is trading for around 9.5X 2011 earnings and offers a yield of 3%. Intel is not exactly a market darling right now, but strong earnings growth and good management make INTC a value investment candidate for 2011.
CVX – Chevron’s yield of 3.1%, along with a PE ratio of 9 and a 17% ROE, make CVX a compelling investment candidate. EV/EBITDA of 5X make this a good place to earn income and hedge against inflation.
COP – Conoco also sports a 3.2% yield and a PE ratio of 9 times. The stock is cheap and Buffett owns it – need I say more?
LO – Lorillard is a Magic Formula stock with an 11X PE and a 6% dividend yield. As someone who has struggled with smoking, I can assure you that the company has a strong moat – nicotine is an evil vice, but selling an addictive product is a lock on future profits. LO is also owned by David Williams of Columbia Value and Restructuring and has huge cash flows from operations.
PM – Philip Morris is a decent value with a 4.5% yield and a 15X PE ratio. PM is best of breed (if you can say that about a tobacco co.) and has large cash flows from operating activities relative to market capitalization.
PG – Procter & Gamble is doing well in China and has proven to be a stable investment in all market environments (except during the flash crash). The balance sheet is not my favorite, but so long as people grow facial hair and need soap, PG should be able to payout their 2.9% dividend yield. At 16X TTM earnings, the stock is not overly “cheap” but the company is safe earnings substantial cash flows.
KO – Coca Cola is the most expensive stock on this list at 19X earnings, but it’s also likely the best company I have mentioned from a durable competitive advantage point of view. 20 years from now people will be drinking Vitamin Water and am fairly sure people will be drinking Coke making the 2.8% yield more attractive.
PFE – Pfizer sports a 4.4% dividend yield and a 7.5X forward PE multiple. PFE is owned by Greenlight Capital and was formerly Fairholme's top pick. The company has had some recent shakeups in management and the buyout of Wyeth was very controversial -- it also levered up the balance sheet a bit.
BMY – Bristol Myers is arguably cheap at 10X free cash flow and 5X earnings (due to a big one time gain) and a 5.4% dividend yield. While the company is not showing signs of strong sales growth, the high yield is worthy of mention.
RTN – Raytheon trades at 10X earnings with a 2.9% yield. Given the uncertainty in the sector, I would sell calls against my stock for added yield.
T – AT&T is a hated stock after the recent I Phone developments, but at 7.66X earnings, 5X operating cash flows, and a yield of 6% investors may be able to make money over the long term even if earnings decline in years ahead as the street expects.
TMX – Telmex, is the Carlos Slim controlled telecoms company that yields over 5% and trades for under 12X operating cash flows… I would be looking to buy major weakness on TMX (if it gets a bit cheaper).
HRB – H&R Block is a Magic Formula name that was a big Buffett holding, yielding 4.6%, and trades for 8.5X earnings. The stock is pretty inexpensive relative to cash flows and I think the mortgage business fears and online tax threats are overblown.
In essence, even though times are uncertain, there are good candidates out there for those investors looking for steady income and security.