One of the things I like best about dividends is that they are
paid incash and thus impossible to fake. With that said, however,
dividends can be cut or eliminated altogether if a weak company
gets into trouble. Dividend cuts may happen ifearnings plummet,
debt covenants kick in, acquisitions are made and any number of
other reasons. If you're an investor who relies on dividends to
supplement your paycheck or retirement, then thebottom line that
you'll have less income to cover life's necessities.
The best way to avoid adividend cut is to limit yourinvestments
to financially strong companies that manage their cash
conservatively. A key measure for this is thedividend payout ratio
, which is the percentage of earnings the company allocates to
cover dividends. Lower payout creates a safe cushion for covering
the dividend even if temporary setbacks depress the company's
The great news for income investors is that we are in the middle
of a "Dividend Decade," a period in which dividendswill account for
ALL of themarket 's return. This is because a select group of few
companies is creating a "money will most likely return to
shareholders in the form of dividends.
So I began my search for the market's safest dividends by
running a screen for companies listed in the New York Stock
Exchange that have shown steady growth and a consistent
track-record of paying dividends, while sporting low payouts and
above-average yields. The four companies described below may well
be the safest dividends in the S&P 500.
is the country's second-largest integrated oil producer
Exxon Mobil (
. The company owns 11.2 billion barrels of oil reserves and
produces 2.7 million barrels of oil daily. Chevron also
owns 17,800 gas stations operating under the Chevron or
Texaco brand names and a 50% interest in a chemicals
business. The $4.3 billionacquisition of Atlas Energy two
years ago gave Chevron a major presence in the prolific
Marcellus shale gas field.
Compared to industry peers such as Exxon,
Shell (NYSE: RDS-A)
, Chevron has higher margins (18.4% versus 11.2% for peers)
and less debt (10% ofequity versus 23% of equity for
peers). Annual growth in earnings per share has averaged 9%
in the past five years.
This dividend champion has a 25-year track record of
paying and growing dividends since the company'smerger with
Unocal in 2005. Payout is exceedingly modest at 26% and
leaves plenty of room for increasing dividends. The last
dividend hike was 11% last April to a $3.60 annual rate
Cleco Corp. (
is a regional energy provider that operates as a regulated
electric utility serving customers in Louisiana (Cleco
Power) and as regulated energy wholesaler (Cleco
Midstream). The company scored a major win for its
wholesale business last year by signing a 10-year contract
to supply power to Dixie Electric Membership Corp. The
contract takes effect in April 2014 and is set to increase
Cleco's electricload by more than 20%. As a result,analysts
predict Cleco's annual earnings growth will accelerate from
2% to nearly 6% in the next five years.
Cleco has paid dividends since 1935 and has recently
been growing payments by 8% a year. Payout is conservative
at 48%. Since 1987, this "steady eddie" has posted total
returns that are 240basis points better than the S&P
500. Last November, Cleco was recognized by its industry
with an award for the best total return in thesmall-cap
stock category. Not to mention, billionaire investor Ken
Fisher holds a small position in Clecostock .
General Mills (
has annual sales of $16.6 billion and owns many of
America's best-known brands, including Cheerios, Betty
Crocker, Pillsbury, Green Giant and Yoplait. General Mills
holds the No. 1 or No. 2market share in baked goods,
desserts, yogurt and several other food categories
The company has posted healthy earnings growth averaging
7.4% in each of the past three years and 8% earnings per
share growth to $1.52 in the first six months of fiscal
2013. Analysts expect higher earnings growth averaging 8% a
year for the next five years.
General Mills has paid dividends without interruption or
reduction for 113 years and has grown the dividend 12% in
each of the past four years. Payout is prudent at only 46%,
which should allow the company to keep growing dividends at
an attractive rate.Shares yield 3.1%.
Northrop Grumman Corp.
Given the likelihood of cuts to the defense budget, it
may be surprising to find defense contractor
Northrop Grumman (NOC)
on a list of safe dividendstocks . But the company
specializes in high-priority categories such as defense
electronics, unmanned aircraft and missile defense that are
unlikely to see major funding reductions.
Northrop has grown earnings at an average annual rate of
11% in the past five years by building a strong presence in
cyber security, surveillance systems and homeland security
assets. Excluding pension costs, the company improved
earnings by 15% in 2012 to $7.47 a share.
Northrop has increased its dividend by at least 8% in
each of the past five years. The last dividend hike was 10%
last May to an annual rate of $2.20 yielding 3.3%. It
maintains a low payout of just 27% of earnings and a
healthybalance sheet showing $3.9 billion of cash. As a
result, Northrop should be able to keep raising its
dividend even if earnings growth temporarily slows.
Risks to Consider:
Northrop has accumulated pension liabilities totaling $6
billion, which may create a drag on future earnings.
Action to Take -->
My top pick overall is Chevron. The company could cover 30 years of
production from its current reserves, is more profitable than its
peers and will benefit from the inevitable rise of oil prices. I
also like General Mills for its dominant market share, accelerating
earnings growth and improving dividend. Cleco is a good choice for
investors who value consistent performance. Northrop has a bit more
risk due to the company's exposure to military spending cuts.