Retirees focused on generating yield from their savings have sought dividend-paying U.S. equities as short-term rates remain low. Retirees looking to protect their portfolio from dividend cuts should review a company's payout ratio to assess the health of its dividend. Unlike fixed-income securities, dividend-paying equities can experience cuts to dividends due to falling earnings.
A company's dividend payout ratio is the dividend per share/earnings per share. A high ratio indicates a company's reliance on stable and consistent earnings to pay the dividend. Conservative retirees should focus on companies with payout ratios less than 65%. Modest payout ratios of these large capitalization dividend paying equities will allow these companies to maintain and grow their dividends despite a weak and volatile economy.
Medtronic, Inc. (MDT) - healthcare
- Price to Earnings: 12.1x
- Dividend Yield: 2.6%
- Debt / EBITDA: 1.9x
- Market Capitalization: $39.2 billion
Rationale - MDT is one of the largest device manufacturers. The company holds a strong share in its core heart devices.
Kraft Foods Inc. (KFT) - food / consumer
- Price to Earnings: 18.5x
- Dividend Yield: 3.1%
- Debt / EBITDA: 3.2x
- Market Capitalization: $65.3 billion
Rationale - KFT is one of the largest packaged foods companies in the world. The company is a key supplier of staple food products.
PepsiCo, Inc. (PEP) - beverage / consumer
- Price to Earnings: 16.1x
- Dividend Yield: 3.3%
- Debt / EBITDA: 2.0x
- Market Capitalization: $103.4 billion
Rationale - PEP operates a global brand with a strong presence in higher growth overseas markets. The company provides a strong dividend yield at a modest valuation.
Johnson & Johnson (JNJ) - healthcare / consumer
- Price to Earnings: 18.4x
- Dividend Yield: 3.6%
- Debt / EBITDA: 1.0x
- Market Capitalization: $176.0 billion
Rationale - JNJ operates a diversified healthcare products business that exhibits stable earnings. The company boasts a great balance sheet and provides a strong dividend yield.
Kimberly-Clark Corporation (KMB) - consumer/ healthcare
- Price to Earnings: 18.5x
- Dividend Yield: 4.0%
- Debt / EBITDA: 1.7x
- Market Capitalization: $29.0 billion
Rationale - KMB holds the top market positions in the primary categories in which it competes in 80 countries around the world.
Payout Ratios | ||||
Company | 2008 | 2009 | 2010 | LTM Period |
Medtronic | 40.7% | 29.3% | 31.3% | 29.3% |
Kraft Foods | 57.7% | 56.7% | 52.9% | 63.2% |
Pepsico | 49.4% | 45.9% | 47.1% | 48.6% |
Johnson & Johnson | 38.8% | 43.4% | 43.5% | 53.4% |
Kimberly-Clark | 56.2% | 52.3% | 57.8% | 65.0% |
