According to the leading magazine — This has proven to be a worst year for dividend cuts in three generations. Striving to conserve cash amid the most severe slump since the Depression, companies are reducing or eliminating their payouts to shareholders.
Banks, of course, have led the way, but also cutting payouts are such stalwarts as Dow Chemical (DOW, Fortune 500) (which hadn’t cut its dividend since it began paying one in 1912!), General Electric (GE, Fortune 500), and Pfizer (PFE, Fortune 500).
Yield stocks always make sense. And even in tough times you can find companies with solid payouts.
But dividends are not yet dead. Some companies have maintained or raised them in the past year, indicating that their payouts can survive even in the worst markets. Ned Davis Research shows that since 1972, companies that increase or begin paying dividends have returned 9.5% a year, soundly beating the 6.8% return of the S&P 500.
You also have to look at the coverage ratio — earnings per share divided by the dividend per share. A figure of two or higher tells you the company has plenty of money to pay its dividend. (Companies with lower coverage ratios can also be steady payers if they have stable cash flows.)
Roger Sit, chief investment officer of Sit Investment Associates, whose Dividend Growth fund has beaten the S&P by 4.9 percentage points a year since 2004, looks for companies with sustainable business models that dominate their industries.
For example, Verizon Communications (VZ, Fortune 500), which yields 6.3%, is among top telecom holding. Verizon’s dividend coverage ratio is below one right now, but Sit analyst Joseph Eshoo considers Verizon’s dividend to be safe and expects the coverage ratio to improve as spending on the FiOS network winds down. Eshoo prefers Verizon to rival AT&T (T, Fortune 500), which offers a similar yield, because of Verizon’s superior mobile network.
Along with talking to fund managers, we examined S&P’s list of stocks that have increased annual payouts for at least 10 years and have estimated coverage ratios of at least two for 2009 and 2010.
Of 69 companies making the cut, the top-yielder, at 4.3%, is Universal (UVV), a Richmond-based tobacco grower with customers like giants Phillip Morris International and Japan Tobacco. With its largest customers selling cigarettes overseas, Universal is sheltered from U.S. legislation and declining smoking rates.
Also making the list was Johnson & Johnson (JNJ, Fortune 500), which we recommendeded last year as one of the best stocks to buy in 2009. The pharmaceutical giant JNJ’s 3.3% yield and 47 consecutive years of increasing dividends make the diverse manufacturer of everything from Band-Aids to Tylenol a strong pick in any environment.