How Safe Are My Dividends?
Summary
- As a Dividend Growth investor, the safety of my income stream is important to me.
- Using the Simply Safe Dividends site, the vast majority of my holdings appear to be in fine shape.
- The research reinforces my eagerness to grow some positions, such as Nike, Apple and Starbucks.
- Is Chevron a cause for concern?
Here in Seeking Alpha's DGI Fun Zone, folks sometimes refer to a company as having a "safe dividend." What does that even mean?
To me, it means the company has a solid balance sheet, with enough free cash flow to cover its dividend. It has an outstanding, sustainable business model, and it has proven over decades that it knows how to handle debt. The company has a history of paying (and, ideally, growing) its dividend year after year after year. There are plenty of other factors, too.
Quantifying all of this objectively is not easy, but it's important for practitioners of Dividend Growth Investing (and other strategies that involve income-generating stocks).
One research tool I like, from McLean Capital Management, is available to investors who use Fidelity brokerage. Using easy-to-understand bar graphs, the registered investment advisory firm goes into depth about free cash flow and how it relates to dividend coverage. For example, this graph shows how MasterCard's (MA) FCF easily covers its dividend.
Another quality research device is available to subscribers of Simply Safe Dividends, a website put together by CPA and equity analyst Brian Bollinger.
Brian, who also has written more than 200 articles for Seeking Alpha, came up with a system to "score" dividend safety. For a thorough explanation of SSD's history and how it works, go HERE.
Scores range from 0 to 100 and represent each company's dividend safety relative to all other income-producing stocks in the market. A 90 means the stock ranks in the top 10% for dividend reliability. A 10 indicates the company scores lower than 90% of all other dividend payers... so run for the hills!
Rating My Portfolio
In addition to rating thousands of companies, the SSD site can score a portfolio after an investor punches in all of the relevant information. I finally got around to doing that, and here were the numbers the site spit out:
It had been a while since I calculated my yield, so it was nice to see that it remains comfortably over 3%. I have worked hard to build a portfolio of high-quality companies, so I was not surprised to see a dividend safety score of 82.
And though a little disappointed by the mediocre 43 for dividend growth, I wasn't stunned by it.
I realize that income growth has slowed for some of the larger, blue-chip companies I own. Plus, I knew when I bought most of my utilities, telecoms and REITs that low-single-digit DG would be the norm. The last year or two I have added some lower-yielding, faster-growing companies, but most such positions are still being built.
I did not put my purchase prices into the SSD form, so yield on cost was not calculated; I'm not a big fan of YOC as a measure, anyway. I also don't concern myself with beta, but I knew that my relatively conservative portfolio would have a low beta.
The following table shows the 44 companies I own, ranked in order of their dividend safety scores. Because I own so many companies that are popular with DGI practitioners, I thought fellow investors would find this information useful.
| Company | DS | DG | Yield | Port% |
|---|---|---|---|---|
| Walgreens Boots (WBA) | 100 | 80 | 1.92% | 1.8% |
| Nike (NKE) | 100 | 93 | 1.22% | 1.4% |
| Hormel (HRL) | 100 | 78 | 1.99% | 0.4% |
| McKesson (MCK) | 99 | 95 | 0.68% | 1.4% |
| Procter & Gamble (PG) | 99 | 36 | 3.17% | 4.1% |
| CVS Health (CVS) | 99 | 88 | 2.49% | 1.1% |
| Altria (MO) | 98 | 47 | 3.28% | 4.2% |
| Johnson & Johnson (JNJ) | 98 | 69 | 2.54% | 6.3% |
| PepsiCo (PEP) | 97 | 62 | 2.79% | 3.3% |
| Starbucks (SBUX) | 96 | 93 | 1.71% | 1.3% |
| Lockheed Martin (LMT) | 96 | 75 | 2.62% | 0.9% |
| Apple (AAPL) | 95 | 92 | 1.75% | 0.9% |
| Microsoft (MSFT) | 95 | 79 | 2.26% | 2.3% |
| Costco (COST) | 94 | 76 | 1.25% | 0.7% |
| WEC Energy (WEC) | 94 | 46 | 3.39% | 4.2% |
| Coca-Cola (KO) | 93 | 47 | 3.30% | 4.2% |
| 3M (MMM) | 93 | 82 | 2.26% | 5.2% |
| Amgen (AMGN) | 92 | 80 | 2.67% | 2.8% |
| Dominion Energy (D) | 91 | 54 | 3.94% | 1.9% |
| Kraft Heinz (KHC) | 90 | 53 | 2.80% | 2.2% |
| McDonald's (MCD) | 89 | 47 | 2.45% | 5.4% |
| General Mills (GIS) | 89 | 39 | 3.47% | 4.0% |
| Southern (SO) | 89 | 18 | 4.85% | 1.8% |
| Gilead (GILD) | 88 | 70 | 2.94% | 1.3% |
| Home Depot (HD) | 87 | 85 | 2.32% | 0.7% |
| AT&T (T) | 85 | 23 | 5.19% | 4.0% |
| Telus (TU) | 85 | 52 | 4.23% | 0.2% |
| Realty Income (O) | 84 | 25 | 4.60% | 2.9% |
| Welltower (HCN) | 84 | 33 | 4.65% | 1.5% |
| Qualcomm (QCOM) | 84 | 52 | 4.13% | 1.2% |
| Target (TGT) | 81 | 45 | 4.74% | 1.4% |
| National Retail (NNN) | 79 | 15 | 4.65% | 0.4% |
| Philip Morris (PM) | 78 | 18 | 3.54% | 4.4% |
| AbbVie (ABBV) | 74 | 90 | 3.53% | 1.4% |
| Ventas (VTR) | 73 | 32 | 4.46% | 1.7% |
| Avista (AVA) | 71 | 13 | 3.37% | 1.4% |
| Omega Healthcare (OHI) | 69 | 42 | 7.63% | 0.8% |
| Boeing (BA) | 67 | 48 | 2.87% | 1.1% |
| Exxon Mobil (XOM) | 65 | 24 | 3.82% | 4.3% |
| Scana (SCG) | 58 | 15 | 3.64% | 1.6% |
| Main Street (MAIN) | 57 | 32 | 5.77% | 1.0% |
| Kinder Morgan (KMI) | 54 | 19 | 2.61% | 0.9% |
| BCE (BCE) | 51 | 35 | 4.73% | 1.5% |
| Chevron (CVX) | 25 | 14 | 4.14% | 3.4% |
Key: DS is dividend safety score; DG is dividend growth score; Yield is dividend yield; Port% is percentage of my stock portfolio that each company occupies. (The table does not include the small positions I have in the couple dozen Dividend Growth 50 companies that aren't in my personal portfolio; combined, they make up about 1% of my overall portfolio.)
Old, New, Big, Small... It's All Good!
Walgreens is one of my oldest positions, and Nike and Hormel are two of my newest. Each got perfect 100s for dividend safety, and all rank pretty high for DG. If the safety and growth scores are added together, Nike's 193 is topped only by McKesson's 194 (99 DS, 95 DG).
Other relatively new and smaller positions that score well include Starbucks, Apple, Costco and Home Depot. I am still looking to add to these positions, perhaps as soon as this week for AAPL, HD or both, as I have some cash available in the account where they reside.
AAPL Dividends Paid (TTM) data by YCharts
Of course, I am pleased to see confirmation that my three largest holdings - Johnson & Johnson, McDonald's and 3M - have very safe dividends. Mickey D's income growth has been in the 5% range in recent years, but I think the company could provide a pleasant surprise when its next hike is announced this fall.
Growing Dominion
Utilities, REITs and oil companies are my biggest laggards when it comes to dividend growth. The only company in that group with a DG score in excess of 50 is Dominion (at 54), one of many reasons I have been increasing the size of my stake in the southeastern utility.
As you can see from the above graphic, Morningstar recently increased its Fair Value Estimate of Dominion to $85. I also like investing in companies with "wide" economic moats and "exemplary" management. Plus, thanks to its solid 7.5% dividend growth the past five years, D is yielding about 4% again. I could see "promoting" Dominion into the core of my portfolio before year-end.
Assessing AbbVie And AT&T
Of the five companies I own with DG scores of 90 or better, AbbVie has the lowest dividend safety score (74). That makes sense to me, as it is one of the more volatile names in my portfolio. The biopharmaceutical firm has been something of a one-trick pony, with its reliance on Humira sales.
Nevertheless, my Seeking Alpha colleague, Chuck Carnevale, said in a recent bullish article that he believes such fears about ABBV are overblown. I am comfortable with my medium-sized position - AbbVie makes up about 1.4% of my portfolio, while accounting for about 1.5% of my income production.
My three highest yielders are Omega Healthcare (7.63%), a REIT; Main Street (5.77%), a BDC; and telecom giant AT&T (5.19%). Combined, the first two make up less than 2% of my portfolio - that is by design, as I consider them to be speculative holdings. Meanwhile, 4% of my portfolio is invested in T, one of the bluer blue-chips out there.
AT&T gets a nice 85 score for dividend safety but only a 23 for DG. Several consecutive years of penny-per-quarter raises tend to stunt income growth, but I like the company's overall direction. CFRA, formerly S&P Global IQ, says T is undervalued.
Oily Apprehension
Of my 14 core positions, the one that worries me most is Chevron... and Simply Safe Dividends confirmed why I have those concerns. A 25 dividend safety score makes CVX the only sub-50 company I own. Adding a bit to the unease: Chevron is my 12th-largest position by dollar value and my No. 6 income producer.
I have been tempted to sell CVX (or at least trim the position) many times, but it has been a high-quality company for so long and its management has been so committed to the dividend that I hate to give up on it just because low oil prices have caused some difficulties the last two years.
As Morningstar analyst Allen Good said:
Chevron returned to profitability in the first quarter as higher oil prices resulted in a dramatic improvement in upstream earnings. ... Chevron remains on track to achieve its prior production growth guidance of 4%-9% for 2017, which is the best among the majors. ... Including $2.1 billion in asset sales proceeds, Chevron was more than able to cover the dividend as well. ... Dividend growth remains a top priority for management, and even though last year’s increase was rather anemic (below 1%), we expect a return to historical growth rates in the coming years as new projects come on line and free cash flow increases materially. Combined with peer-leading growth that will result in margin expansion and a leading portfolio of reinvestment opportunities, including a large cost-advantaged Permian position, this makes Chevron one of the best-positioned majors, in our opinion.
Aside from Exxon Mobil, there is no other oil company I want to own. And I certainly don't want to sell CVX to buy more XOM - a move that would make Exxon Mobil by far my biggest holding. So I plan to stay the course for now while closely monitoring CVX.
Conclusion
When it comes to investing, I hate the word "safe." I have gone into comment streams to gently chide fellow contributors who have declared a stock to be "safe." You want safe? Buy an FDIC-insured CD!
Having said that, I have no problem with referring to the relative safety of a company's dividend. If JNJ and MMM eliminate their dividends, it means that the Zombie Apocalypse is officially upon us.
Aside from those I've seen on The Walking Dead, I haven't spotted any zombies lately. So I feel pretty good about JNJ, MMM and, well, just about all of the companies I own.
This article was written by
Disclosure: I am/we are long ABBV, MO, AMGN, T, BA, KO, CVS, XOM, GIS, GILD, JNJ, MCK, MSFT, NNN, PEP, PM, TGT, WBA, BCE, COST, KHC, MAIN, OHI, QCOM, O, SCG, SO, WEC, HCN, MMM, LMT, PG, AAPL, CVX, HD, MCD, NKE, HRL, SBUX, TU, AVA, D, KMI, VTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.