3 Big, Reliable Dividends Built on Business Models Even I Can Understand
Nov 7th 2012 10:15PM
Updated Nov 8th 2012 3:10AM
Whether you're new to investing or have been at it for a lifetime, you need to understand the business models of the companies you invest in, because understanding how a company makes money will significantly reduce your overall investing risk.
In that spirit, today we'll look at three companies with straightforward business models, strong dividends, and a knack for longevity. Because what good is a great dividend if the company's not going to be around long enough to pay it out?
1. McDonald's (NYS: MCD)
A company that needs no introduction, but will get one anyway. McDonald's sells food -- sandwiches, fries, shakes, and so much more -- and the world buys it all, in droves. How easy is that to get your head around? And in a world of expanding markets and expanding tastes, McDonald's has adapted well. As such, it's in the vanguard of American fast-food/casual-dining joints that's moving successfully into emerging markets around the world.
- I normally look for dividend yields of around 3%: an arbitrary threshold, but one I feel separates the wheat from the chaff. McDonald's easily surpasses this benchmark, paying 3.5%, while staunch domestic and international competitor Yum! Brands (NYS: YUM) pays only 1.9%.
- I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable. At 53%, McDonald's is right in the pocket. Yum!, to its credit, comes in at an even healthier 34% on this metric.
McDonald's five-year average dividend yield is 3.1%, which argues fairly well for the current 3.5% to hang around for a while. Its performance as a business in general right now isn't stellar, but many companies are struggling in this depressed global economy. The Golden Arches have been around since 1940 are aren't set to go away anytime soon.
2. Coca-Cola (NYS: KO)
Another company that needs no introduction. Coke's business model is even simpler than McDonald's, focusing on just one thing: the manufacture, sale, and distribution of beverages. And Coke is almost unarguably the best in the business at what it does, with a massive 60% gross margin for the trailing 12 months, indicative of competition-beating manufacturing efficiencies, brand power, and pricing power.
- I said I look for a 3% yield on dividend stocks. At 2.8%, Coke just misses it, but it's too good a company to pass up because of two-tenths of a percentage point. PepsiCo (NYS: PEP) , Coke's perennial competitor, actually does bit better on yield, coming in at 3.1%.
- And at 52%, Coke's payout ratio is just about perfect. At 56%, Pepsi's payout ratio is also very good.
Coke has a five-year average dividend yield of 2.8%, which argues well for the continuation of the current identical yield. And for those with a bent for corporate social responsibility, like myself, Coke has a solid track record, with initiatives that include responsible marketing, energy efficiency and climate protection, and sustainable agriculture: all projects that can be tracked in the company's annual sustainability report. Check out the company website for detailed info.
3. Spectra (NYS: SE)
Two words: natural gas. The industry is booming right now, in case you've been living on another planet for the past few years, with the controversial procedure known as "fracking" opening up natural gas opportunities previously undreamed of, right here in the United States. Spectra is a new public company, having split off from Duke Energy in 2007, but has been in the energy business for nearly a century.
- At 4.3%, Spectra easily surpasses our 3% benchmark.
- At 62%, Spectra's payout ratio is a bit high, but not alarmingly so.
Spectra's five-year average dividend yield of 4.5% argues well for the continuation of the current 4.3%. And again, for those with a socially responsible investing bent, note that in September 2012 Spectra was named to the Dow Jones Sustainability World Index for the third consecutive year and to the Dow Jones Sustainability North America Index for the fifth consecutive year. Go Spectra.
Have a Coke and a smile, Fools
Energy companies are all the rage right now, and McDonald's may have the good sense to open vegetarian restaurants in the vegetarian-heavy country of India, but Coca-Cola is too much of a manufacturing, sales, and distribution machine to pass up. The company is such a worldwide juggernaut that, even with the lowest (yet not really low) dividend yield of the three, I think it's the strongest, longest-play company of them all.
Thirsty for even more investing advice on Coke, and maybe a different take? Here's what one of our Foolish analysts has to say on the subject: "While there's absolutely no question Coca-Cola has been great to long-term shareholders, the company faces some new threats to its continued market dominance." Get the rest of the story in this Motley Fool premium report. Simply click here now for complete access.
The article 3 Big, Reliable Dividends Built on Business Models Even I Can Understand originally appeared on Fool.com.Fool contributor John Grgurich owns no shares in any of the companies mentioned in this column. Follow John's dispatches from the bleeding edge of capitalism on Twitter, @TMFGrgurich . The Motley Fool owns shares of Coca-Cola, McDonald's, Spectra Energy, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola, PepsiCo, McDonald's, and Spectra Energy and creating a bull call spread position in McDonald's. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a gripping disclosure policy.
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