There’s no point in betting on dividend income if the company has to slash or suspend its payouts. Not only do you lose that stream of dividends you were counting on, but the stock will tank on a price basis, because any company cutting or stopping its dividend is signaling something very bad about its business.
If a dividend-paying stock’s yield is too good to be true, it probably is. Witness Nokia (NYSE:NOK), which we wrote about recently. The troubled mobile device maker currently yields nearly 10% — but that’s less a reflection of generous payouts than it is the fact that shares have lost more than half their value in the past year. (As with bonds, a dividend-paying stock’s yield goes up as its price falls.)
The big money isn’t stepping in to grab that juicy yield because it’s looking very likely that Nokia won’t be paying a dividend in 2013. The company, burning through $300 million a month, needs to conserve cash. It’s even considering selling its headquarters.
So how do you find generous dividends you can count on? InvestorPlace’s list of Dependable Dividend Stocks is a good place to start. Yes, many of the companies are a snooze, and they might not blow you away with share-price performance, but these guys have been paying and raising their dividends for decades.
Another clever way to suss out reliable, generous yields is to look at what the market is saying about a company’s ability to keep the cash stream coming.
Analysts at Citigroup (NYSE:C) run a pretty brilliant screen doing just that. Courtesy of the good folks at Barron’s, Citi looked for generous dividend-payers that also get high marks from the market in credit default swaps. CDS’s are essentially insurance policies that pay off in the event a company’s bonds go bad. The cheaper the CDS, the lower the credit risk.
As Barron’s Michael Aneiro writes:
“The latest version of Citi’s list consists of 54 global companies with a 4.8% average yield, and Citi forecasts these dividends to grow by 6% in 2012 and 4% in 2013. The constituents have an average five-year CDS of 66 bps [basis points], equivalent to the sovereign CDS of Austria and just a tad more costly than the 54-bps CDS of Germany, indicating a similar perceived likelihood of default over the next half-decade.”
Those are very attractive attributes for any dividend payer — high yield and growing, but having essentially the same risk profile as the sovereign debt of Austria, and nearly the same as Germany.
Without further ado, here are the 16 U.S.-based companies that made Citi’s list:
- Altria Group (NYSE:MO), dividend yield 5.2%
- American Electric Power (NYSE:AEP), dividend yield 4.3%
- AT&T (NYSE:T), dividend yield 4.7%
- Bristol-Myers Squibb (NYSE:BMY), dividend yield 4%
- ConocoPhillips (NYSE:COP), dividend yield 4.6%
- Consolidated Edison (NYSE:ED), dividend yield 4.1%
- Dominion Resources (NYSE:D), dividend yield 4%
- Duke Energy (NYSE:DUK), dividend yield 4.8%
- Eli Lilly (NYSE:LLY), dividend yield 4.1%
- Exelon (NYSE:EXC), dividend yield 5.9%
- Intel (NASDAQ:INTC), dividend yield 5.1%
- Lockheed Martin (NYSE:LMT), dividend yield 4.5%
- Reynolds American (NYSE:RAI), dividend yield 5.4%
- Southern Co. (NYSE:SO) dividend yield 4.3%
- Verizon (NYSE:VZ), dividend yield 4.5%
- Xcel Energy (NYSE:XEL), dividend yield 3.9%
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.