The Dow's Safest Dividends
Jun 23rd 2013 9:02AM
Updated Jun 23rd 2013 9:04AM
One remarkable fact about the Dow Jones Industrials is that all 30 of its components pay dividends. But as we saw during the financial crisis, just because a stock pays a dividend now doesn't mean that it will necessarily be able to keep paying that dividend into the future.
Investors can't afford to get stuck with a dividend stock that doesn't deliver on its promise to provide steady income. So with that in mind, let's take a closer look at the stocks in the Dow to see if we can find the ones that are in the best position to keep making their current payouts for years to come.
A healthy dividend
Among Dow stocks, UnitedHealth Group leads the way in dividend strength with a ratio of dividends to earnings of just 16% on a trailing basis. That number will go up on a forward basis, simply because UnitedHealth boosted its payout by a whopping 32% earlier this month.
Even with the increase, though, UnitedHealth's 1.8% yield still lags well behind the Dow's 2.5% average. Health-insurance companies historically have tended to hold onto their cash rather than raising payouts, but lately, dividends have been on the rise, and UnitedHealth's actions show just how much investors expect successful companies to share their profits.
Don't leave home without dividends
American Express is in much the same position as UnitedHealth, with its 20% payout ratio slated to rise after AmEx's 15% dividend hike at the end of April. AmEx has an even less attractive yield, though, with its new dividend raising its yield to just 1.3%.
AmEx has recovered well from the financial crisis, but what it needs to bolster growth is to attract a wider customer base. With a new prepaid debit card to serve the underbanked population, AmEx could find a whole new set of customers to help it increase its profits even further going forward.
Low dividends are easier to pay
When you look at the rest of the low-payout-ratio list, you'll see similarly conservative dividend practices. Disney has just a 22% payout ratio, but its dividend yield is just 1.2%, despite having the huge profit engines of Marvel-based movies and its blockbuster media network to rely on. Similarly, IBM has made great strides in the tech industry, diversifying early beyond its former reliance on hardware and scoring much more lucrative high-margin business in other sectors. But even after a recent dividend increase, IBM still yields less than 2%.
For long-term investors, what's more important than current yield is a company's capacity to keep paying dividends at current or growing levels. Those stocks that can do so make good investments for dividend investors.
Keep your eyes open
Of course, these payout ratios are only as good as the earnings that they're based on. Just about every company in the market is vulnerable to some combination of unlikely but still possible events that could lead to income drying up and force dividend cuts. In all likelihood, though, these stocks give you a better chance of avoiding that fate than some of the more dangerous dividend stocks in the market.
The article The Dow's Safest Dividends originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends American Express, UnitedHealth Group, and Walt Disney and owns shares of IBM and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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