There’s nothing worse than buying a stock with a juicy dividend yield, only to find that yield isn’t sustainable. A dividend cut is often followed by a big sell-off in the stock, since a dividend cut is usually a bad sign for a company. I’ve found three dividend plays, however, that I think are as safe as they come, and which you can park your cash in for a long period of time.
The first place to look is at Ashford Hospitality Trust’s 9% Series E Preferred Stock (AHT). First, have a quick glance at my article on preferred stocks. Bottom line: preferred stocks tend to move very little in price, offering the stability and safety of a bond, while it trades more like a stock. However, preferred stock rarely trades in tandem with the common stock, because the preferred offers greater security to holders of it than of common stock should the company go under. Recently, the market has over-reacted in regards to the hotel sector’s prospects in the face of the current economy with regards to the common stocks – Marriott (MAR) stock is down 20% from its July high, Starwood Hotels and Resorts (HOT) is down 28%, Sunstone Hotels (SHO) is down 45%, and Strategic Hotels and Resorts (BEE) is down 40%. Ashford is down almost 50%. However, Ashford’s liquidity position and overall stability is such that it survived the financial crisis in better shape than virtually all of its peers. Consequently, its preferred stock is very stable, and at a price of $23.44, it trades at a 6% discount to fair value, along with a safe 9% dividend.
Speaking of preferred stocks, have a look at Wells Fargo Capital XI, 6.25% Trust Preferred Securities (WFC). Wells Fargo is still on solid ground financially. While its common stock has been hammered YTD (down 20%), the preferred is flat. Sure, you get a nice little 2% yield on the common, but a 6.25% yield on the preferred. It’s a no-brainer. It’s certainly a better move than buying Bank of America (BAC). I don’t like the fact that Warren Buffet bought $5 billion of special preferred shares to help shore up the bank’s finances. Its toxic mortgage portfolio still seems to be hidden from view in terms of its actual toxicity. I’d avoid that stock and its preferred shares.
For those not into preferred stocks, and want a solid regular dividend on a common stock, you have to go with Altria Group (MO). People are always going to smoke, there’s just no two ways about it. Not only is the company swimming in free cash flow, but it’s 5.9% yield isn’t going anywhere. You could also go with Philip Morris International (PM) if you prefer to cast a wider net on sales of smokes, and still pick up a 4.7% payout.
Disclosure: I am long AHT.