One of the biggest pitfalls for investors who like dividend paying stocks is reaching for extravagant yields. For sure, some double-digit yields are safe – for a while. But those numbers can be a sign of trouble that eventually leads to a cut in dividends. And when that happens, the pain is two-fold. First is the loss of income, and the second is capital losses when the stock price plunges as investors bail out.
So here, I want to make a case for the dividend tortoises instead of the rabbits. I’m talking about seven companies that have such a long history of dividend payments and are so financially solid that they are unlikely ever to never their dividends.
- Kinder Morgan Energy Partners (KMP) Kinder Morgan is a major player in the energy business that operates pipeline and storage facilities for oil and gas companies. Just like the world always will need oil and gas, its drillers and refiners will always needs ways to transport and store it. KMP sports a gaudy but sustainable 7% yield with dividends that that have increased steadily over the years.
- Intel (INTC) Intel has been, and always will be, the king of the chipmakers. Intel has a near-monopoly, as well as free cash flow that is as regular as a pharmaceutical company’s. INTC’s 3.4% yield even has room to rise, but management probably wants to keep a lid on it as the business is capex-heavy.
- Novartis (NVS) Novartis is a perfect selection because it has a slew of pharmaceutical products and always is on the hunt for new ones. That means consistent and reliable cash flow, which means consistent and reliable dividends. Novartis’ 3.3% yield is supported by free cash flow three to four times in excess of dividend payments.
- Coca-Cola (KO) The venerable soft drink company continues to see its tendrils reach to the furthest reaches of the globe. Its answer to declining soda consumption is diversification into things like energy drinks, bottled water, tea, coffee and fruit juices. The company generates well over $7 billion in free cash flow annually and spends a little more than half of it paying KO shareholders a 3.2% dividend. Coca-Cola makes scads of money, and there’s no sign that’s ever going to change.
- Merck & Co(MRK) Merck is not a stock I’d place in your high-growth portfolio, but if you’re looking for a healthy and reliable payout (3.1%), look no further. Merck has a very long history of fat cash flow and dividend growth you can count on to continue.
- DuPont (DD) DuPont is another classic play that I also like as part of a core stalwart portfolio. DuPont’s 8% projected 5-year earnings growth rate , plus a 2.7% yield, on top of free cash flow that is churned out like clockwork make DD stock a no-brainer.
- Exxon Mobil (XOM). XOM literally generates tens of billions of dollars in cash flow every year and only pays out a third of it to shareholders. Its 2.6% dividend might not be gigantic, but it’s always going to be there.
These seven stocks represent world-class operations that will be around long after all the high-growth, non-dividend-paying momentum stocks have vanished. And the money they put in your pocket will last even longer.
About Lawrence Meyers
Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at [email protected]