Apart from bankruptcy, nothing has the ability to hammer dividend stocks like a dividend cut or suspension. Indeed, the entire point of investing in dividend stocks is to find companies that pay reliable and rising dividends over long periods of time.
Revenue can ebb and flow, earnings can come and go, but as long as dividend stocks are buttressed by a gusher of levered free cash flow, there’s little reason to worry that the dividend spigot will be turned off.
Levered free cash flow (LFCF) is too often overlooked as a measure of health in dividend stocks, but it’s arguably the most important factor in determining whether a company will keep up its payouts. After all, levered free cash flow is what’s left after a company pays interest on debts, dividend, capital expenditures, you name it.
LFCF is also a good yardstick for finding cheap stocks. Price-to-earnings (P/E) is more popular, sure, but price-to-levered free cash (P/LFCF) flow can be a better metric. Dividend stocks can dive if a company posts a net loss, screwing up the P/E, but if the company has billions in cash sloshing around, that dividend (now with a higher yield) is abundantly safe.
We decided to scour the market for cheap, high-dividend stocks generating unusually high levered free cash. These dividend stocks had to be in the Russell 1000, have a yield of at least 5% and a P/LFCF multiple of less than 15.
Based on those criteria, here are three great dividend stocks where cash is king, as they have big piles of cash leftover after paying interest and everything else you can think of: