The great global recession has been tough not only for stock prices but also for dividends as well. Many stocks that had a history of producing strong dividends in the financial sector have seen their dividends eliminated or severely cut after taking in billions in Tarp money, due to severe losses from the global financial crisis. During 2009 so far there has been roughly one dividend cutter for every dividend raiser. Over the past 5 years this ratio has been more like 6 to 1 in favor of the dividend growers. This is a huge change and you should now user tougher criteria when picking dividend producing stocks who’s dividend looks sustainable over the long run.
While dividend statistics have been rather scary, the negative dividend news has been concentrated in the financial sector. A well diversified portfolio of income producing stocks should have held up better then the broad market during the recession.
Even in these tough economic conditions, there still are companies, which are generating enough cash flows and are confident enough in their business to increase distributions. It really is a no brainer that a company, which generates enough earnings to cover dividend payments by a factor of 2 or is much less likely to cut or eliminate distributions, compared to a company, which pays out almost all of its cash flows out as dividends. So one sign of a strong sustainable dividend producing stock is that it’s dividend payout is 50% or less.
Two other criteria which point to a sustainable dividend producing stock are a solid dividend yield which is about equal or greater then the 10 year US Treasury Note( currently about 3.4%). The other additional criteria are to make sure the stock has a reasonable P/E ratio. I would say no higher then 15 but would look for stocks who’s P/E are closer to 10, want to avoid buying overvalued stocks.
Using the following three criteria, a dividend payout of 50% or less, dividend yield over 3% (close to the 10 year T-note yield) and a P/E of 15 or less, I came up with the following stocks that meet all 3 of the above criteria:
|
Symbol
|
Name
|
Dividend Yield
|
P/E
|
Div Payout Ratio
|
|
ABT
|
Abbot Laboratories
|
3.60%
|
13.20
|
53% - close enough
|
|
DOV
|
Dover Corp
|
3.10%
|
14.01
|
28%
|
|
EMR
|
Emerson Electric
|
3.80%
|
14.08
|
42%
|
|
JNJ
|
Johnson & Johnson
|
3.30%
|
13.79
|
43%
|
|
MCD
|
McDonald’s
|
3.60%
|
14.88
|
53% - close enough
|
|
MHP
|
McGraw-Hill Corp
|
3.20%
|
12.44
|
36%
|
|
PG
|
Procter & Gamble
|
3.40%
|
12.45
|
49%
|
|
SWK
|
Stanley Works
|
3.20%
|
11.87
|
47%
|
|
VFC
|
VF Corp
|
3.60%
|
14.06
|
44%
|
Note: I do not own any of the above mentioned stocks
