If you're a longtime subscriber to my free
newsletter, you might remember an issue way back in March where I
hunted down the safest
in the S&P 500.
The response to my article was overwhelming. So I've decided to
provide an update -- taking the same rigorous metrics I applied
before to discover where the safest dividend in the S&P is
Thankfully, the draconian cuts that we saw in 2008-2009 seem to be
history. Believe it or not, these cuts added up to $52 billion in
lost income during 2009 -- and that's just the cuts for stocks in
the S&P 500. To put that figure in perspective, losing $52
billion would put Warren Buffett into bankruptcy.
Today the news looks much brighter: Standard & Poor's reports
that through the first three quarters of 2010, 1,033 companies have
increased dividend payments, compared with 707 in 2009. Even so,
dividend safety still has its place. During the first three
quarters of the year, 117 companies cut their payments.
To make sure you don't have to worry about dividend cuts, I've
taken a look at every dividend-payer in the S&P 500 to find the
safest yields available right now. Let's see who took home the
Safety Criteria #1: Yield
When it comes to
, it usually takes something above 6% to garner even a second look
from me. So I started my search with all the stocks within the
S&P 500 that yield above that magic 6% number.
As I suspected, it turns out the common stocks in the S&P 500
don't offer much in the way of yields overall, but you can still
find a few individual companies offering attractive payments. (For
the record, I typically broaden my income search to include
closed-end funds, exchange-traded bonds, master limited
partnerships -- and a bevy of other asset types -- to bring readers
and my premium
newsletter the most attractive yields.)
In total, eight stocks in the S&P (only 1.6% of the total)
yielded 6% or more. Of those, the highest-yielding stock was
Frontier Communications (
, which pays investors 8.4% a year.
With this handful of stocks in focus, I turned to my next metric to
uncover the safest dividend:earnings power.
Safety Criteria #2:Earnings Power
It's not uncommon for "sick" stocks to carry high yields. Based on
a poor outlook, investors will dump the shares, causing the yield
to go up. To combat this potential pitfall, I looked at the
one-year growth in
for each of the eight stocks with a yield above 6%.
Operating income is the profit realized from the company's
day-to-day operations, excluding one-time events or special cases.
This metric usually gives a better sense of a company's growth than
per share, which can be manipulated to show stronger results.
Given the slow recovery in theeconomy , I searched for companies on
my high-yield list able to manage any growth in operating income
during the trailing twelve months, indicating the business was
still able to thrive after one of the worst recessions in recent
memory. After screening for positive one-year growth in operating
income, I was left with the four candidates shown in my table:
Safety Criteria #3: Dividend Coverage
No measure of dividend safety carries as much weight as the
. By comparing the amount of cash available each quarter against
how much is paid in dividends, we can know whether a company can
continue paying its current dividend even if conditions worsen.
For the payout ratios, I looked simply at
free cash flow
during the trailing 12 months, compared to dividends paid. Many
investors look at earnings, but earnings can sometimes be
misleading. Instead, free cash flow is a measure of cash generated
by the company after capital expenditures. This cash can be used
for just about anything -- expansion, research and development, or
most importantly, dividends. Here's what I found:
You can see that all the high-yielders here had payout ratios under
100% based on free cash flow during the last twelve months.
However, given cigarette manufacturer Altria's 98% payout ratio, I
did find it riskier than the rest of the list. Nearly all its free
cash flow was spent on dividends. This doesn't mean the company
will cut the payment, but the risk appeared much higher than with
the other three members of our list.
Safety Criteria #4: Proven Track Record
To finally nail down what I think is the safest dividend in the
S&P, I took a look at the track record of the three stocks left
in the running.
I gave special credit to those companies that maintain -- and raise
-- dividend payments through thick and thin. This shows dedication
to paying dividends and also that the company will maintain its
payment if it hits a rough patch.
Action to Take -->
Looking into the track record of each of these companies offered
mixed results. Frontier Communications, a telecom provider based in
Connecticut, had the lowest payout ratio and highest yield, but the
company recently cut its dividend to $0.19 per share from $0.25.
This reduced dividend should ensure its safety for the years ahead,
but it does leave a sour taste in the mouths of long-time
Apart from Frontier, Windstream Corp. and CenturyLink, both telecom
stocks as well, have above-average yields and have demonstrated an
ability to cover their dividends under tough economic conditions.
If pressed, I'd have to tip the scale to Windstream, giving favor
to its longer track record of paying high yields. But honestly, it
looks like all three of these options should provide a high and
stable yield for the coming years.
-- Carla Pasternak
Carla Pasternak has nearly 30 years of income investing
experience, including serving as the Director of Research for
High-Yield Investing. Read More...
P.S. Investing in dividend-paying stocks is one of the most
profitable ways to beat the market. For more on stable stocks that
will grow your money with ever-increasing dividends, see Carla
Pasternak's latest course, The 5 Rules Every Income Investor Has to
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.