5 Safe And Cheap Dividend Stocks To Invest In (March 2021)

Summary

• This article is part of our monthly series where we highlight five companies that are large cap, relatively safe, dividend paying, and are offering large discounts to their historical norms.
• It's always a good idea to keep your wish list ready by separating the wheat from the chaff.
• We go over the filtering process to select just five conservative DGI stocks from more than 7,500 companies that are traded on US exchanges, including OTC networks.
• In addition, we present two other groups of 5 DGI stocks, each for investors who need higher yield.
• Looking for a portfolio of ideas like this one? Members of High Income DIY Portfolios get exclusive access to our model portfolio. Get started today »

The market rally that started in early November last year has continued into the new year. However, more recently, we are witnessing a highly volatile situation in the market with some big down days. Even though the broader market is only marginally lower than its most recent highs, but many individual stocks, especially in the technology sector, have lost much more. The increased and sustained volatility is definitely a cause for concern for the future direction of the market.

We should always remind ourselves that there's only one thing certain in markets, and that's "uncertainty." Obviously, the big question that remains is where do we go from here?

Data by YCharts

S&P 500 ETF (SPY) one-year chart, courtesy YCharts

As we always have said, we should look at investing as a long-term game plan and not on the basis of day-to-day or week-to-week gyrations. As long-term dividend investors, we need to pay less attention to the short-term movements of the market and pay more attention to the quality of companies that we buy and buy them when they are being offered relatively cheap. The goal of this series of articles is to find companies that are fundamentally strong, carry low debt, support reasonable, sustainable, and growing dividend yields, and also trade at relatively low or reasonable prices. These DGI stocks are not going to make anyone rich overnight, but if your goal is to attain financial freedom by owning stocks that should grow their dividends over time, meaningfully and sustainably, then you are at the right place.

The market is not easy to navigate, even during the best of times. At the same time, we do not want to lose our sleep over our investments. So, it's all the more important that we invest in companies that have many years of dividend history, pay growing and sustainable dividends, and have low or manageable levels of debt. We remain on the lookout for such companies when they are trading cheap on a relative basis to the broader market as well as to their respective 52-week highs. We believe in keeping a buy list handy and dry powder ready so that we can use the opportunity when the time is right. Besides, we think, every month, this analysis is able to highlight some companies that otherwise would not be on our radar.

This article is part of our monthly series where we scan the entire universe of roughly 7,500 stocks that are listed and traded on US exchanges, including over-the-counter (OTC) networks. However, our focus is limited to dividend-paying stocks only. We usually highlight five stocks that may have temporary difficulties or lost favor with the market and offering deep discounts on a relative basis. However, that's not the only criteria that we apply. While seeking cheaper valuations, we also demand that the companies have an established business model, solid dividend history, manageable debt, and investment-grade credit rating. Please note that these are not recommendations to buy but should be considered as a starting point for further research.

This month, we highlight three groups of five stocks each that have an average dividend yield (as a group) of 2.71%, 5.51%, and 7.35%, respectively. The first list is for conservative investors, while the second one is for investors who seek higher yields but still want relatively safe investments. The third group is for yield-hungry investors but comes with an elevated risk, and we urge investors to exercise caution.

Note: Please note that when we use the term "safe" regarding stocks, it should be interpreted as "relatively safe" because nothing is absolutely safe in investing. Also, in our opinion, for a well-diversified portfolio, one should have 15-20 stocks at a minimum.

Goals For The Selection Process

Regular readers of this series could skip this section to avoid repetitiveness. However, we include this section for new readers to provide the necessary background and perspective.

We start with a fairly simple goal. We want to shortlist five companies that are large-cap, relatively safe, dividend-paying, and trading at relatively cheaper valuations in comparison to the broader market. The objective is to highlight some of the dividend-paying and dividend-growing companies that may be offering juicy dividends due to a temporary decline in their share prices. The excess decline may be due to an industry-wide decline or some kind of one-time setbacks like some negative news coverage or missing quarterly earnings expectations. We adopt a methodical approach to filter down the 7,500-plus companies into a small subset.

Our primary goal is income that should increase overtime at a rate which at least beats inflation. Our secondary goal is to grow the capital and provide a cumulative growth rate of 9%-10% at a minimum. These goals are by and large in alignment with most retirees and income investors as well as DGI investors. A balanced DGI portfolio should keep a mix of high-yield, low-growth stocks along with some high-growth but low-yield stocks. That said, how you mix the two will depend upon your personal situation, including income needs, time horizon, and risk tolerance.

A well-diversified portfolio would normally consist of more than just five stocks and preferably a few stocks from each sector of the economy. However, in this periodic series, we try to shortlist and highlight just five stocks that may fit the goals of most income and DGI investors. But at the same time, we try to ensure that such companies are trading at attractive or reasonable valuations. However, as always, we recommend you do your due diligence before making any decision on them.

Selection Process

The S&P 500 currently yields about 1.50%. Since our goal is to find companies for our dividend income portfolio, we should logically look for companies that pay yields that are at least better than the S&P 500. Of course, the higher, the better, but at the same time, we should not try to chase high yield. If we try to filter for dividend stocks paying at least 1.80% or above, nearly 2,000 such companies are trading on US exchanges, including OTC networks. We will limit our choices to companies that have a market cap of at least $10 billion and a daily trading volume of more than 100,000 shares. We also will check that dividend growth over the last five years is positive.

We also want stocks that are trading at relatively cheaper valuations. But at this stage, we want to keep our criteria broad enough to keep all the good candidates on the list. So, we will measure the distance from the 52-week high but save it to use at a later stage. After applying the current criteria defined so far, we got a smaller set of about 330companies.

Criteria to Shortlist

• Market cap > $10 billion and Dividend yield > 1.75%
• Daily average volume > 100,000
• Dividend growth past five years >= 0

By applying the above criteria, we got roughly 330 companies.

Narrowing Down the List

As a first step, we would like to eliminate stocks that have less than five years of dividend growth history. We cross check our list of 330 stocks against the CCC list (list of Dividend Champions, Contenders, and Challengers created by David Fish and now maintained by Justin Law). The CCC list currently has 745 stocks in all the above three categories. The CCC list currently includes 142 Champions with more than 25 years of dividend increases, 323 Contenders with more than ten but less than 25 years of dividend increases, and 280 Challengers with more than five but less than ten years of dividend increases.

After we apply this filter, we're left with 172 companies on our list. However, the CCC list is quite strict in terms of how it defines dividend growth. If a company had a stable record of dividend payments but did not increase the dividends from one year to another, it would not make it to the CCC list. We also want to look at companies that had a stable dividend history of more than five years, but maybe they did not increase the dividend every year for one reason or another.

At times, some of them are foreign-based companies, and due to currency fluctuations, their dividends may appear to have been cut in US dollars, but in reality, that may not be true at all when looked at in the actual currency of reporting. So, by relaxing this condition, a total of 56 additional companies qualified to be on our list, which otherwise met our basic criteria. After including them, we had a total of 228 (172+56) companies that made our first list.

We then imported the various data elements from many sources, including CCC-list, GuruFocus, Fidelity, Morningstar, and Seeking Alpha, among others, and assigned weights based on different criteria as listed below:

• Current yield: Indicates the yield based on the current price.
• Dividend growth history (number of years of dividend growth): This provides information on how many years a company has paid and increased dividends on a consistent basis.
• Payout ratio: This indicates how comfortably the company can pay the dividend from its earnings. This ratio is calculated by dividing the dividend amount per share by the EPS (earnings per share).
• Past five-year and 10-year dividend growth: Even though it's the dividend growth rate from the past, this does tell how fast the company has been able to grow its earnings and dividends in the recent past. The recent past is the best indicator that we have to know what to expect in the next few years.
• EPS growth (mean of previous five years of growth and expected next five years growth): As the earnings of a company grow, more than likely, dividends will grow accordingly. We will take into account the previous five years' actual EPS growth and the estimated EPS growth for the next five years. We will add the two numbers and assign weights.
• Chowder number: This is a data point that's available on the CCC list. So, what's the Chowder number? This number has been named after well-known SA author Chowder who first coined and popularized this factor. This number is derived by adding the current yield and the past five years' dividend growth rate. A Chowder number of "12" or more ("8" for utilities) is considered good.
• Debt/equity ratio: This ratio will tell us about the debt load of the company in relation to its equity. We all know that too much debt can lead to major problems, even for well-known companies. The lower this ratio, the better it is. Sometimes, we find this ratio to be negative or unavailable, even for well-known companies. This can happen for a myriad of reasons and not always a reason for concern. This is why we use this ratio in combination with the debt/asset ratio (covered next).
• Debt/asset ratio: This data is not available in the CCC list, but we add it to the table. The reason we will add this is that, for some companies, the debt/equity ratio is not a reliable indicator.
• S&P's credit rating: Again, this data is not available in the CCC list, and we will add it manually. We get it from the S&P website.
• PEG ratio: This also is called the price/earnings-to-growth ratio. The PEG ratio is considered to be an indicator if the stock is overvalued, undervalued, or fairly priced. A lower PEG may indicate that a stock is undervalued. However, PEG for a company may differ significantly from one reported source to another, depending on which growth estimate is used in the calculation. Some use past growth, while others may use future expected growth. We are taking the PEG from the CCC list, wherever available. The CCC list defines it as the price/earnings ratio divided by the five-year estimated growth rate.
• Distance from 52-week high: We want to select companies that are good, solid companies but also are trading at cheaper valuations currently. They may be cheaper due to some temporary down cycle or some combination of bad news or simply had a bad quarter. This criterion will help bring such companies (with a cheaper valuation) near the top, as long as they excel in other criteria as well. This factor is calculated as (current price - 52-week high) / 52-week high.

Below is the table with weights assigned to each of the ten criteria. The table shows the raw data for each criterion for each stock and the weights for each criterion, and the total weight. Please note that the table is sorted on the "Total Weight" or the "Quality Score." The list contains 228 names and is attached as a file for readers to download: 5_Safe_And_Cheap_DGI_Stocks_-_File_for_Expot.xlsx.

Selection of the Final 25

To select our final 25 companies, we will follow a multi-step process:

We will first bring down the list to roughly 50 names by automated criteria, as listed below. In the second step, which is mostly manual, we will bring the list down to about 25.

• Step 1: We will first take the top 15 names in the above table (based on total weight or quality score).
• Step 2: Now, we will sort the list based on dividend yield (highest at the top). We will take the top 10 after the sort to the final list.
• Step 3: We will sort the list based on five-year dividend growth (highest at the top). We will take the top 10 after the sort to the final list.
• Step 4: We will then sort the list based on the credit rating (numerical weight) and select the top 10 stocks with the best credit rating (in fact, 11 because of a tie). However, we only take the top two from any single industry segment because, otherwise, some of the segments tend to overcrowd.

From the above steps, we have a total of 48 names in our final consideration. The following stocks appeared more than once:

Appeared two times: ADP, AEM, C, MMM, PG (five duplicates).

After removing five duplicates, we are left with 43 names.

Since there are multiple names in each industry segment, we will just keep a maximum of three or four names from the top from any one segment. We keep the following:

• Financial Services, Banking, and Insurance:

Financial Services: (MS.PK)

Asset Management: (BK), (STT), (BLK)

Banking: (NYSE: C), (NYSE: BAC)

Insurance: (AFL), (PGR)

• Business Services:

(ADP)

• Industrials:

(CI), (MMM)

• Materials:

(APD), (CE), (SCCO)

• Mining/Gold:

(AEM), (NEM)

• Defense:

(LMT)

• Consumer/Retail/Others:

Cons-defensive: (PG), (CLX), (TSN)

Cons-discretionary: (QSR), (MO)

• Communications/Media:

(T)

• Healthcare:

(OTCQX:RHHBY), (JNJ), (GSK), (MRK)

• Technology:

(TXN), (HPE), (AVGO)

• Energy:

Pipelines: (ENB), (OKE), (EPD),

Oil & Gas: (XOM), (CVX)

• Utilities:

(ATO)

• REIT:

TABLE-1: List of Top 43

[Source: Author/Financially Free Investor]

Final Step: Narrowing Down to Just Five Companies

This step is mostly a subjective one and based solely on our perception. The readers could select any of the above 30 names according to their own choosing or as many as they like.

The readers could certainly differ from our selections, and they may come up with their own set of five companies. We make three lists for different sets of goals, dividend-income, and risk level. Nonetheless, here's are our final lists for this month:

Final A-List (Conservative Safe Income):

• (PG)
• (LMT)
• (BK)
• (JNJ)
• (TXN)

Final B-List (High Yield, Moderately Safe):

• (T)
• (PGR)
• (ENB)
• (MRK)
• (NYSE:C)

Final C-LIST (Yield-Hungry, Less Safe):

• (T)
• (PGR)
• (ENB)
• (GSK)
• (MO)

Please note that there are some stocks that are present in multiple lists. In fact, there are three names that are shared by B-List and C-list this time. The reason is that some of the names can fit multiple objectives - for example, a stock can be reasonably safe while producing high-yield. Secondly, we try to make each of our lists fairly diversified among different sectors/industry-segments of the economy.

We may like to caution that each company comes with certain risks and concerns. Sometimes these risks are real, but other times, they may be a bit overblown and temporary. So, it's always recommended to do further research and due diligence.

Nonetheless, we think the first set of five companies (in the A-List) would form a solid group of dividend companies that would be appealing to income-seeking and conservative investors, including retirees and near retirees. Our final list of five has, on average, 33 years of dividend history that includes two dividend-aristocrats, 10.75% and 12.27% annualized dividend growth during the last five and 10 years. All five names have an excellent credit rating (A- or above) and trading on an average of 11.4% discount from their 52-week highs. Their average dividend/income (as a group) is decent at 2.71%. If you must need higher dividends, consider B-List or C-List, but for A-list, we just want to stick with quality and conservative names with excellent credit ratings.

The second list (B-list) includes a couple of names that may be a bit riskier but elevate the average yield of the group to 5.51%. This list offers an average yield of 5.51%, an average of 16 years of dividend history, with two of them being dividend aristocrats, excellent past dividend growth, and a nearly 17% discount from their 52-week highs.

The C-List is for yield-hungry DGI investors, but we urge due diligence. Nothing comes free, so there will be more risk involved with this group. Even then, it's a diversified group. The average yield for the group of five goes up to 7.35%. The average discount (from a 52-week high) is about 17%.

Below is a snapshot of five companies from each of the three groups:

Table-2: A-LIST (Conservative Income)

[Source: Author/Financially Free Investor]

Table-3: B-LIST (High Yield)

[Source: Author/Financially Free Investor]

Table-4: C-LIST (Yield-Hungry, Elevated Risk)

[Source: Author/Financially Free Investor]

Conclusion

We have demonstrated our filtering process to narrow down a large list of stocks to a very small subset. We have presented three groups of stocks (five each) with different goals in mind and to suit the varying needs of a wider audience.

The first group of five stocks is for conservative investors who prioritize the safety of the dividend over higher yield. The second group reaches for a higher yield but with only a slightly higher risk. The first group yields 2.71%, whereas the second group doubles the yield to 5.51%. We also presented a C-List for yield-hungry investors. However, this group comes with an elevated risk and may not be suited for everyone. We believe the first two groups of five stocks each make an excellent watch list for further research and buying at an opportune time.

Analyst’s Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, RQI, STAG, STK, USA, UTF, UTG, TLT. 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.

Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. The author is not a financial advisor. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolios presented here are model portfolios for demonstration purposes. For the complete list of our LONG positions, please see our profile on Seeking Alpha.