Investors love the safety of dividends. 24/7 Wall St. wanted to look for some of the safest dividends in the large-cap universe. Many of course are DJIA components, as you would expect. We took a review of sectors to bring up ten of the safest dividends as they look at today’s snapshot. We are also considering which companies can hold or grow their payouts even if we get the double-dip recession. After screening many sectors and many stocks, ten of the safest dividends that surfaced are 3M Co. (NYSE: MMM), Procter & Gamble (NYSE: PG), Wal-Mart Stores, Inc. (NYSE: WMT), Microsoft Corporation (NASDAQ: MSFT), Pfizer Inc. (NYSE: PFE), The Coca-Cola Company (NYSE: KO), YUM! Brands, Inc. (NYSE: YUM), Visa, Inc. (NYSE: V), Verizon Communications Inc. (NYSE: VZ), and American Electric Power Co., Inc. (NYSE: AEP).
With dividend tax rates surging in 2011, investors may also flock to those companies with what are deemed the safest dividends. Dividend screening is used for chasing “value stocks” and for “defensive stock” investing. We have added the dividends, a yield analysis, general peer comparisons, dividend coverage today versus earnings expectations ahead, and we have added color on each where applicable.
Conglomerates are of course always a go-to for dividends, at least they were before the financial meltdown. But out of the sector, it is 3M Co. (NYSE: MMM) which comes out on top. Its recent reiteration helps of course, but this a long-term basis. Of the major conglomerates out there, 3M also has perhaps the easiest of balance sheets to understand. It is also far less likely to fall under as many regulatory branches as at least some of its conglomerate peers that have exposure to financial, defense, and other sectors which are routinely coming under fire. The company has raised dividends each consecutive year, even through the meltdown, and the current annualized payout of $2.10 comes to a yield of about 2.70%. With Thomson Reuters estimates at $5.59 EPS for 2010 and $6.20 EPS for 2011, 3M has more than enough room to raise its dividends well into the future.
In the consumer goods sector, it is Procter & Gamble (NYSE: PG) which comes out on top as the safest dividend ahead. P&G is not the highest yielding of the consumer staples out there, but its size and its market dominance add to the strength here. The giant also have very solid dividend coverage on its earnings versus its payout. The $1.93 annualized dividend was recently raised again by 10% and does come to a yield of about 3.20%. With Thomson Reuters estimates of $4.12 EPS for June-2010 and $3.99 EPS for June-2011, its dividend coverage ratio here is over 2.0. Considering the Flash-Crash was unusually cruel to P&G, it should be noted that a sudden drop to $48 like had been seen would possibly not even be the case if Greece, Spain, or another nation just disappeared overnight.
The retail sector has one clear dividend winner for the safest dividend. Wal-Mart Stores, Inc. (NYSE: WMT) takes the cake here by far. Its $1.21 annualized payout generates a dividend yield of approximately 2.50%. The move for China’s slightly more market float policy of the Yuan will make for new pricing challenges for Wal-Mart, but the good news for it is that the same is true elsewhere in the retail sector now that China makes so many of our goods. Wal-Mart was the winner of the recession and even if more of the gains end up back at rivals it is Wal-Mart that is going to be the price-point winner. With Thomson Reuters estimates at $4.01 EPS for Jan-2011 and $4.40 EPS for Jan-2012, there is still more than ample room for Wal-Mart to grow its payout. It has incredible expansion opportunity outside the United States, but it isn’t exactly as though Wal-Mart is going to be out opening hundreds of new super-centers year after year any longer throughout America.
Microsoft Corporation (NASDAQ: MSFT) takes the cake for the safest dividend in technology. It is not the highest of the big-cap tech and software companies as far as a dividend yield is concerned, but Microsoft never really found itself in a situation where it was preparing the world for quarterly losses during the financial meltdown. This one is also the largest ‘utility’ when it comes to the basic world of technology, and it is still at the start of the next upgrade cycle. The $0.52 annualized dividend comes to a yield of roughly 2.10%. With Thomson Reuters estimates at $2.05 EPS for June-2011 and $2.31 EPS for June-2012, Microsoft has a significant opportunity to raise its payout when you consider that it also has close to $50 billion in cash, short-term investments, and long-term investments combined. While a large buyback could eat into that cash, a special dividend declaration as seen in 2004 could be on the agenda. After all, this is almost certain to be the last year where dividends are also taxed at only 15%.
In the drug and medical sector, Pfizer Inc. (NYSE: PFE) is of course almost entirely on the drug side of the equation. Now that its big deals are likely behind it, its coming drug pipeline problems are far from a unique situation. That is the case at most major Pharma players today, and the recent sell-off has made Pfizer’s dividend look artificially low. Barron’s just this last weekend has pointed out how the drug sector is trading at levels that assume worse than a worst case for the economy and the regulatory environment. Barron’s even noted that the sector could appreciate 30%, but that is a different matter than the safety of dividends. The lower payouts are coming back up and the $0.18 dividend is above the $0.16 interim dividend after the rate had been previously been $0.32 per quarter. The current $0.72 annualized dividend compares to Thomson Reuters’ estimates of $2.17 EPS for 2010 and $2.27 EPS for 2011. Pfizer may want to pay off some of its long-term debt, but in the field it seems to have the most protection on its current payout versus a possible increased payout in the years ahead.
In the beverage and food sectors, the Coke and Pepsi investor dividend taste test winner was a very close call and came down to The Coca-Cola Company (NYSE: KO) being the ultimate winner on the safest dividend. Both have boosted dividend payouts, and the $1.76 annualized payout from Coke comes to a yield of roughly 3.50%. It may just have to do with the notion that Coca-Cola shares are down from 52-week highs more than Pepsi today. Still, with Thomson Reuters expectations being $3.45 EPS for 2010 and being $3.74 EPS for 2011, there is still room for Coke to boost its payouts in good times and hold the line in bad times. This was one of the closest calls between two industry giants.
In dining, casual dining and fast food is just about always going to be a clearer picture than many specialty food chains. McDonald’s might seem the clear leader. But when it comes to dividend safety, the math points to YUM! Brands, Inc. (NYSE: YUM) as the “safest of dividends” in the dining sector. The payout yield is far lower at 2.10% versus almost 3.30%. But the dividend coverage ratio versus future earnings expectations also leaves YUM! with the most ease of covering its dividend and raising it if times remain good. YUM! also seems to be the China winner, something that cannot be ignored, and that also leaves its currency exposure less in that region. YUM’s $0.84 annualized payout compares to Thomson Reuters estimates of $2.48 EPS for 2010 and $2.78 EPS for 2011, giving YUM the best dividend coverage.
The financial sector is still a mess because of all the pending regulations and because of all of the ongoing issues about the government and regulators wanting the banks to keep building up reserves over paying out dividends to holders. The credit card sector is also under fire over interchange fees, but these industry changes are not going to hurt the processors as much as those which are processors and also have the late-fee fight loss along with the consumer credit risk. This leaves Visa and Mastercard, with Visa, Inc. (NYSE: V) coming out as the safest dividend due to a yield advantage and a share liquidity advantage. With more and more of the world becoming consumers each day, fund managers love the processing and engine mechanism that these companies have even if interchange fees are coming down. Visa’s $0.50 annualized payout is almost certain to go higher in the coming quarters, and Thomson Reuters’ estimates of $3.89 EPS for 2010 and $4.69 EPS for 2011 leaves more than enough room for continued dividend growth. The company also has a solid balance sheet that gives it flexibility to weather the storm of even a double-dip recession versus other financial stocks.
Telecom has been a steady dividend sector for years, and the safest dividend stock between leaders Verizon and AT&T looks to leave Verizon in the lead for the safest of the dividend payouts ahead. Both companies have raised dividends year after year and both may continue to hike payouts. It was a very close call, but the 6.7% payout of Verizon Communications Inc. (NYSE: VZ) is marginally safer than the 6.8% yield of AT&T, Inc. (NYSE: T). Verizon is expected to get the iPhone in 2011, and it has managed to grow despite the win of Apple’ so-far exclusivity of the iPhone. Verizon’s network coverage is less-taxed as far as bandwidth usage. It is also expected to start receiving dividends of its own from Verizon Wireless with Vodafone. We are not looking for significant dividend growth, but the $1.90 payout today compares to estimates from Thomson Reuters of $2.33 EPS in 2010 and $2.48 EPS in 2011. This was a tough call, but it is on the network and the opportunities ahead that came to the “safest dividend” winner over outright payouts.
The electric utility sector is the one that has been historically been the highest and safest of dividend yields. That has not translated to real stock performance of late, and there is a broad range of dividend yields in the sector. We did not choose the highest nor the lowest in yield, and we wanted a mix of energy sources for its power so that it had more diversification when it comes to the coming climate change and regulatory hurdles the industry faces down the road. A middle of the road on income versus yield versus dividend coverage left American Electric Power Co., Inc. (NYSE: AEP) as one of the safest dividends in the sector. Serving over 5 million customers in 11 states (Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia, and West Virginia), AEP generates electricity using coal and lignite, natural gas, nuclear, and hydroelectric energy. Traditionally, AEP is not up the creek when it comes to natural disasters such as hurricanes and earthquakes. Investors also have to love that it shows up in the “Defend My Dividend” initiative. The $1.68 annualized payout was recently raised after 10 quarters of a $1.64 annualized payout, making the dividend hike rather small and what may seem boring on the surface. That also makes for one of the safest dividends with conservative management. The current yield is 5.10% and its forward P/E ratio is roughly 11. Again, this is not the highest nor the lowest in yield and valuation; but it is diversified in geography and is diversified in power sources. The estimates from Thomson Reuters of $3.03 EPS for 2010 and $3.24 EPS for 2011 leaves room for dividend growth in the years ahead even if it has just recently boosted its payout.
There are of course many more sectors that were not reviewed. That means more of the safest dividend reviews may still come.
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JON C. OGG