For many of us, having a solid dividend income is synonymous with having a safe and happy retirement. Whether you are an early retiree or a laggard income investor, one thing to look for is the safety of dividends. A company needs to have a history of dividend growth, as well as potential to increase dividends in the long term. To identify whether a stock fits into that criteria, one needs to look for not only the contemporary dividends, but the underlying fundamentals. Here, is a diversified list of my favorite dividend stocks associated with strong business models that will continue to create profits:
1) Intel (NASDAQ:INTC) is one of the safest and cheapest large-cap dividend-growth companies on the market. Over the last 10 years, profits have been going up along with dividends. While the quarterly dividends were 2 cents in 2003, the current dividend of 21 cents per share indicates a yield of 3.42%. Intel is a cyclical company whose profits are strongly correlated with economic growth. As we are experiencing something of a recovery I expect Intel to break its record this year. Moreover, the management is shareholder friendly, as it keeps raising the dividend regardless of current profits. The balance sheet shows an almost $50 billion differential between current assets and current liabilities, which means dividends have plenty of room for growth.
2) AT&T (NYSE:T) is another safe dividend stock which should not be ignored. Since the technology bubble burst, AT&T has been treated as a bad stock to be punished for its past sins. However, the dividend yield of 5.48% is one of the best in the industry. The stock is still trading 30% below its 2007 peak, and 60% below the 2000 peak. Given its business area, AT&T is one company that can transfer the inflationary input costs to customers by simply increasing its charges (mostly the hidden ones). There is an ever increasing demand for data related services. One global trend is to use wireless providers as a means of payment. Once that technology becomes widespread in U.S., it will open new opportunities for AT&T. This is another reason to consider AT&T as a dividend pick for the next 5 years.
3) McDonald's (NYSE:MCD), recognizable by its famous golden arches symbol, MCD has one of the best business models in the world. The company provides franchisees with the logo, the material, the inputs, and the means to utilize the inputs to produce the most essential thing in any traders life: hamburger and fries. While the current P/E ratio of 17 is a little pricey, the forward P/E falls to 14.55. McDonald's brand image in emerging markets is even higher than in the U.S. or Western Europe. Although it is known as a cheap food here, it symbolizes high-quality, and tasty food in rest of the world. The company even offers delivery services in many countries around globe. Its only real competitor is Burger King (private) which is not yet as global as McDonald's. Its Last dividend announcement of 61 cents indicated a yield of 3.02%.
4) ConocoPhillips (NYSE:COP), the little brother of Exxon (NYSE:XOM), is a solid dividend payer with a yield of 3.70%. Considering the relatively low payout ratio of 27.91%, there is a lot of room for dividend growth. The current P/E ratio of 8.6 is expected to fall to 8.1 by the end of this year. The PEG ratio of 0.81 is below the norm of 1. The stock's momentum could not push through the $80 resistance level and shares retreated back to $71. The fall-back might continue for a while, but it also means an opportunity for those interested in purchasing the stock. It is one stock that can double its dividends in the next 5 years.
5) Southern Corporation (NYSE:SO), is the largest electricity producer in the U.S. Atlanta-based Southern Corp has an aggressive growth policy, and recently acquired a 30-megawatt solar power plant in New Mexico. While the stock has gone hyperbolic in the last few weeks, the yield of 4.67% surely beats government bonds. It could be a good anchor in a dividend portfolio once the price retreats back to the $36 -$38 range.
6) I reserved the last spot for a tobacco company. Given the profitability and substantial dividends of cigarette producers, it is quite hard to make a choice. However, I like companies with international exposure. Phillip Morris (NYSE:PM) has one of the best product lines in the business and is known as a high quality brand. Marlboro has a brand value of $29.1 billion -- higher than any other brand in the business. Within the last three years, quarterly dividends increased by almost 40%, from $0.46 in 2008, to $0.64 in 2011. The company has enough cash-generating capacity to keep the current yield of 3.75%. Although one of the directors has been accumulating PM shares for a long time, the stock is already up by 18% since January. The current P/E ratio of 16.7 is also little pricey. It would be a nice addition to a retirement portfolio, if prices fall back to the $60 level.
Please note that the above list is not based on a scientific approach, but rather a subjective analysis of the existing business models. Surely, there are many other companies worth to consider in a dividend portfolio. Feel free to have a look at carefully screened list of top dividend stocks for the ultimate retirement portfolio.
Disclosure: I am long INTC, but I might initiate a long position in PM in next 72 hours.