The Safest Dividend in the Dow
Wednesday, February 4, 2009
Printer-Friendly | PDF Version | Whitelist Us  | Also visit StreetAuthority
The Safest Dividend in the Dow
-- By Andy Obermueller

     A number of dividends in the Dow Jones Industrial Average are looking pretty juicy these days. Pundits have been debating whether the highest-yielding Dow component, General Electric, will continue its hefty 10.9% payout. Though the company has promised to stand by its obligation to shareholders, you can see why some investors -- given last year's drubbing -- are less likely to take such a pledge at face value.

     So the question is appropriate: Which company has the safest dividend in the Dow? We sorted through the blue-chip index and applied several stringent criteria to arrive at the surprising answer.  (Full Story Below)

Also in Today's Issue...

They Laughed at Us, But Now We're Making +28% Per Pick
When we first introduced this strategy, some investors laughed. They didn't believe you could build real wealth by picking one stock a month and never having more than 12 holdings. Turns out they were wrong. 94% of our closed trades are up, and we're averaging a +28.7% gain on each one.

Give me five minutes and I'll show you how...
7 Stocks to Double Your Money in 2011
Louis Navellier's top 7 stocks are all riding a number of exciting new earnings trends that will not only beat the market by $3-to-$1 this year, but also earn 30% to 50% gains in next 90 days. Get full details, along with buy-below and target prices, in your FREE copy of 7 Stocks to Double Your Money in 2011.

Download your FREE report now!

    The Safest Dividend in the Dow

     Anyone looking for a motto for 2009 need look no further. The catchphrase for the year, at least for income investors, has to be "safety first." Following last year's dismal performance, investor caution has morphed into anxiety. Wall Street and Main Street are both looking for something they can be sure of.

     It used to be that dividend payers themselves were the thing investors could be sure of.  Tucked in the shadow of the Wall Street darlings, these venerable firms conducted their business, posted their earnings and paid their dividends. These companies all made money the old-fashioned way. They earned it. High-flying? No. Dependable? Yes.

     Well, we all saw what happened -- last year was a terrible year for dividends. So now it's time to apply last year's hard lessons and take a clear-eyed look at risk, performance strength, dividend coverage and, lastly, potential return.  

     We'll start by setting the bar high, with some of the strongest names in America. The 30 members of the Dow Jones Industrial Average are worth a collective $2.74 trillion and are considered the strongest in their fields. We'll sift through these corporate titans to find the absolutely safest dividend.

     Safety Criteria No. 1: Yield

     The first step in our process is not to look at the Dow at all, but to peek into the debt market, where a 10-year "AAA"-rated bond pays 4.9%. If we can't beat that cash return with a stock, then we might as well stick with the ultra-safe bonds.

     This eliminates most of the Dow. Though it pays an average dividend of 3.9%, about 50 basis points higher than the S&P 500 Index, only eight Dow components yield more than the "AAA" bond. They are shown in the chart.
Company Name Current Yield
Merck (NYSE: MRK) 5.0%
Caterpillar (NYSE: CAT) 5.6%
Verizon (NYSE: VZ) 5.8%
J.P. Morgan Chase (NYSE: JPM) 6.3%
AT&T (NYSE: T) 6.5%
DuPont (NYSE: DD) 7.0%
Pfizer (NYSE: PFE) 8.4%
General Electric (NYSE: GE) 10.9%

    Safety Criteria No. 2: Performance Strength

     Next, we're going to borrow a page from our colleagues in the value investing world. They recommend focusing on companies with rising, or at least steady, earnings. To that end, we will shy away from any company expected to show more than a -5% decline in earnings this year, based on the consensus Bloomberg estimate.

Company 2008 EPS '09 Est. EPS Change
Merck $3.29 $3.29 0%
Caterpillar $5.66 $2.49 -56.0%
Verizon $2.54 $2.54 0%
J.P. Morgan $0.98 $1.80 +83.7%
AT&T $2.81 $2.71 -3.6%
DuPont $2.78 $2.04 -26.6%
Pfizer $2.42 $2.27 -6.2%
General Electric $1.93 $1.27 -34.2%

     This eliminates four companies that are estimated to show appreciable declines in earnings this year.

     We're left with four firms: Merck, J.P. Morgan, Verizon and AT&T.

     Safety Criteria No. 3: Dividend Coverage

     Remember, safety is first. With that in mind, we're going to look into the most recently reported quarter for each company and compare net earnings to total dividends paid. This is a tough hurdle to clear: The second half of 2008 presented extremely difficult operating conditions. Any company able to maintain its performance in such a punishing environment clearly has demonstrated a wide economic moat.

     Here are the results:

     Merck recorded $1.1 billion in net earnings and paid $808 million in dividends.

     J.P. Morgan Chase earned $702 million and paid $1.4 billion to its shareholders.

     Verizon came close to meeting its dividend, but couldn't fund it from operations. It earned $1.24 billion and dipped into its pocket to come up with part of its $1.30 billion dividend.

     AT&T earned $2.40 billion and paid out $2.35 billion.

     We must exclude any company that paid more in dividends than it earned. That sort of arrangement is unsustainable.  Any company whose dividend costs exceed its net earnings lacks the margin of safety that conservative income investors in this market must demand.

     Safety Criteria No. 4: Upside Potential

     We're left with two companies, Merck, the drug maker whose dividend amounted to 73% of its net earnings last quarter, and AT&T, whose earnings covered its dividend with $50 million to spare.

     Certainly at this point it's worthwhile to revisit our initial criterion and simply ask which company has the highest yield. It's AT&T, whose payout exceeds Merck's by 150 basis points. Now, even though that's a wide margin, we want to be sure we aren't missing out on potential upside. We'll use that as our tiebreaker.

     AT&T shares are trading at roughly nine times its trailing earnings of $2.82 per share. A return to its five-year average multiple of 14 would mean a share price of almost $40 -- +55% higher than the current price. Throw in the 6.5% dividend and the best-case scenario for investors is a total return of +62% based on Tuesday's closing price.

     Merck, for its part, typically sells for nearly 14 times earnings. The market is currently valuing the shares at nine times TTM earnings of $3.35. If Merck returns to its historical valuation, the capital gain would amount to +55% for a total gain above +60%.

     Based on these criteria, AT&T can be considered not only the strongest dividend in the Dow, but also the dividend payer with the greatest total upside -- though the race was extremely close.  A 6.5% dividend is respectable -- but the real opportunity with AT&T is to be paid an extremely safe rate of return while waiting for a robust capital gain.

      Many happy returns!

 

 

Andy Obermueller
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd. 
Gaithersburg, MD 20878-1614

P.S. -- Don't miss a single issue! Add our address, Research@GlobalDividend.com, to your Address Book or Safe List. For instructions, go here.


Income Notes

The yield on the S&P 500 (3.4%) is higher than the yield on 10-year Treasuries (2.9%) for the first time since 1958.

The last time this happened, the market saw +43.4% gains in 1958 and +12.0% gains in 1959.

-- GDO Research Staff


U.S. real estate investment trusts may pay more of their dividends in 2009 in stock rather than cash to save $10 billion a year.

"Seventy companies out of 100 are likely to do this," said Dean Frankel of Urdang Securities. "It's about liquidity and concerns over debt. Every dollar they have, the better."

REITs, a $465 billion industry, could save $10 billion this year by paying 90% of dividends with stock, according to Bloomberg calculations using Merrill Lynch forecasts.

-- Bloomberg


Who Needs a Bull Market When You're Up +113% In These 10.1% Yielders?

This small group of consistent double-digit yielders have surged an average of +113% in two years. Discover how these unusual securities are delivering hefty capital gains and dividend yields of 10% or more to certain investors.

Go here for the details...


Recent Articles

Take Advantage of Historically High Yields from the World's Soundest Banks
By Carla Pasternak
January 14, 2009

With capital ratios that are the envy of every banker from London to Santiago, Canadian banks are among the best capitalized.  What's more the country's largest players are continuing to post strong results -- and paying out mouth-watering dividends.

Read On...


Four Income Hotspots for a Prosperous New Year
By Andy Obermueller
January 7, 2009

The U.S. is in recession, but there are plenty of places where things are booming.  Not only did these countries fare well in 2008, they're going to post strong growth in 2009 and through 2010.  Plus, stocks in these countries are cheap, and, best of all, each of these countries sports a higher-than-average dividend.

Read On...


 

 


Reader Favorites

My Secret to Lasting Dividend Income
By Amy Calistri

How to Hide From the Dividend Tax Increase
By Carla Pasternak


 

 


 

Home | Issue Archives | About Us | Meet the Staff | FAQ | Contact Us | Subscribe | Premium Content
Research Reports | Media Coverage | Testimonials | Privacy Policy | Terms of Use | Disclaimer | Advertise

StreetAuthority Financial Network Web Sites:

      

DISCLAIMER: GlobalDividends.com and its parent company, StreetAuthority, LLC, are publishers of financial news and opinions and NOT securities brokers/dealers or investment advisors. You are responsible for your own investment decisions. All information contained in our newsletters or on our web site(s) should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision. As a condition to accessing our materials and web sites, you agree to our Terms and Conditions of Use, available here, including without limitation all disclaimers of warranties and limitations on liability contained therein. Owners, employees and writers may hold positions in the securities that are discussed in our newsletters or on our web site.

(C) Copyright 2001-2012. StreetAuthority, LLC  All Rights Reserved.
Unauthorized Reproduction or Distribution is Strictly Prohibited.

Subscribe for FREE

Subscribe to Dividend Opportunities today and you'll receive a FREE newsletter three times a week, plus a FREE in-depth research report that identifies some of today's highest-yielding securities.

There's absolutely nothing to purchase, we'll keep your email address private, and you can cancel at any time. You truly have nothing to lose, so take advantage of this no-hassle, risk-free offer today!

Click here to subscribe now.