Dividend Watchdog: How Safe Are These 8 Yields?

Includes: ABT, GE, JNJ, MCD, MO, NTR, T, VZ
by: Investment Underground

We're starting a Dividend Watchdog series here at Investment Underground. The purpose? To examine how safe the dividend yields are for widely held stocks. Here are 8 names the Dividend Watchdog thinks are safe right now.

If you’re looking for stocks to provide long term dividend income wealth, it’s important that the company both pays dividends and increases them. It can be difficult to predict future payouts and easy to chase high yields.

It’s important to realize the potential of strong dividend growth rates, but that’s not to say that a safe current yield isn’t important. As always, use the information below as a starting point for your own due diligence.

General Electric (NYSE:GE) doesn’t need much introduction, but here it is anyway: Based in Fairfield, Connecticut, this technology/media/energy conglomerate has products in planes, trains and microwaves, not to mention the staples of everyday life such as water, gas, light, appliances and software.

GE had a long and stable history of paying dividends for over 25 years, but you won’t see this “symbol of American business,” as Warren Buffett calls it, on any dividend aristocrat or champion list.

In February of 2009, GE announced a severe quarterly dividend cut from $0.31 to $0.10, citing a precautionary move to insure liquidity. Today the company is still cautious, but has since increased the dividend payout three times to $0.15 a quarter. It’s still a long cry from the $0.31 mark in 2008, but the 3% current yield is historically in line.

Combine the recovering economic times with the 41% payout ratio and you’re starting to paint a more acceptable picture. The 1.82 beta might seem high for such a well-established company, but then again it might just be the thing the stock needs to reach the 21% expected one-year median upside held by 15 brokers.

Johnson & Johnson (NYSE:JNJ): This $160 Billion healthcare company has consistently increased dividends for an impressive 48 straight years. The 3.4% current yield is above average and another dividend increase might be on its way very soon. How safe is the dividend? The 45% payout ratio and strong history suggest dividends will continue to grow in a perfectly safe way. Given the near 11% average 5 year growth rate, JNJ’s 3.4% current yield could turn into a 10% yield on cost in just 10 years. Just imagine you’re payouts doubling every 7 years. The Dividend Watchdog approves!

Potash Corporation of Saskatchewan (POT) The eponymous producer of the fertilizer input, Potash Corp, maintains its number one position globally in the potash game. If you listen to the analysts over at UBS, which as with all analysts we would caution you to do with prudence, Potash Corp might well be gold. Potash shares experienced a few stairstep leaps in price last year, but have fallen back a bit.

Potash is used for corn crop production, among many other things; and corn prices have skyrocketed upwards as of late. Wet weather is delaying corn seeding, according to the department of Agriculture. In the intermediate run, farmers should be more willing to pony up for more potash given that potash broadcast on corn acres produces significant yield increases for farmers (at least in North America).

The political class appears interested in continuing ethanol subsidies, and Potash is certainly to be a fat beneficiary of ethanol mandates for years to come. The current yield is low, only .76%, but with a payout ratio hovering just above 15%, there is plenty of room for the yield to grow. With commodity prices likely to stay high, the Dividend Watchdog thinks the meager yield here is safe.

Abbott Laboratories (NYSE:ABT): This Illinois based drug manufacture has increased dividend payouts for 39 straight years and has a current yield of 3.7%. The 65% payout ratio is in line and the dividend growth rate has been quite stable hovering around 10% for the 1, 3, 5 and 10 year averages. Further ABT has slightly increased its dividend payout growth rates as of late. If Abbott can keep it up for the next 10 years it’ll come in with a yield on cost just under 10%; do it for 20 years and it’ll be closer to 25%. Buy now and 20 years later you could be looking at substantial returns.

AT&T (NYSE:T): Does AT&T have a strong dividend history? Yes it does. This No. 2 telecommunications firm has increased dividend payments for the last 27 years and has a current yield of 5.6%. True that yield was above 6% just a month ago, but it’s still well above average. T has a payout ratio of 51% and looks poised to stay in the business of paying shareholders.

The average dividend growth rates don’t inspire much awe, hovering around 5%. At that pace it would take a little over 14 years for the current 5.6% yield to double to 11.2% (Thanks rule of 72!). AT&T’s current yield might be appealing for the short term, but its low dividend growth rate exposes the power of compounding growth in other stocks; a buy for short term income, not so much for long term prospects.

If you’re in to above average yields, double digit dividend growth rates and a strong history of making payouts consider Altria (NYSE:MO). This tobacco manufacture has not only paid but also increased dividend payments for 42 straight years and has a current yield of 5.8%. Many refuse to hold this smoking giant due to its ‘sinful’ business and after all a bad reputation and price add-ons, or “sin taxes”, can’t be good for business.

But then again, with over a billion smokers consistently providing their inelastic demand, MO does have significant pricing power. The 81% payout ratio is approaching worrisome, but the 5 year average dividend growth rate nearing 15% and strong payout history are promising. If Altria can keep the same growth rate for the next five years your yield on cost would double to over 11%; and that’s before any price appreciation. Looks like a medium term buy opportunity. Of all the names on the list, it seems like Altria or Potash's dividends are the most at risk. However, we believe risks of a dividend cut are low.

Verizon (NYSE:VZ) doesn’t have the lengthy history of T, having increased its dividend payouts for just 6 straight years. The current yield of 5.2% is well above average, but has only been growing at just under 4% for the last 5 years. A quick check of the clearly unsustainable 213% payout ratio and investors should show great caution. Although to be fair it had been in line in the past. With the averages, it would take VZ about 5 more years than T to reach the same 11.2% yield and, as discussed, AT&T wasn’t overly impressive.

On a dividend level T looks like a better option if you’re choosing between the two, but those looking for big time yield on cost in the future might want to avoid these current high yield “traps”. Regardless, the dividend is very safe.

With that in mind let’s move to the lowest yielding stock on the list so far, McDonald’s (NYSE:MCD). Ok, so with a 3.2% current yield it isn’t exactly below average, but it does show the opportunity for growth quite well. In 2000 the current yield was just 0.7% and has since moved to the 3.2%, but the yield on cost has increased to 7.6% during that same period. That’s the power of growing dividends and time.

MCD has been making monumental upgrades in its dividend payouts with a 10 year average dividend growth rate close to 27%. It has slowed to the low double digits as of late, but with the 53% payout ratio there’s plenty of room for future increases. Using a modest 10% dividend growth rate the yield on cost would double within 8 years. Or given a more optimistic 15% or 20% rate, yield on cost could hit double digits in that same 8 year span. Either way a reasonable yield and strong growth opportunities should prove to be a promising buy opportunity for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.