9 Dividend Stocks for a Full Calendar of Safe Income

Build a secure monthly income stream by targeting blue-chip dividend stocks based on when they pay out

By Brian Bollinger, Simply Safe Dividends

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Source: Robin Corps Via Flickr

We all have monthly bills, so why not have monthly dividends? Nifty idea but how to make it happen with safe dividend stocks?

9 Dividend Stocks for a Full Calendar of Safe IncomeThe most obvious answer, especially for retired income investors, is to purchase stocks that pay monthly dividends. The downside to that is there are only a limited number from which to choose, many monthly dividend stocks score low using our Dividend Safety Scores and the yields won’t make your eyes light up.

There is a better way. It offers both a high degree of dividend safety and a high yield that averages a strong 3.7%. What’s the secret?

Invest in blue-chip stocks.

Yes, you’re almost certainly already doing that. (And if you’re not, you should be.) But the trick is to invest in blue-chip stocks with mostly similar yields, and quarterly dividend payouts that are staggered in a way that each month, three of the companies pay you a dividend.

This is just another way for us to help you accumulate assets and prepare for the day when you can choose between work and play.

Let’s get started filling your income account with super-safe blue-chip dividend stocks. All told, they offer an annual yield of 3.4%. Here’s the list, starting with stocks in the January cycle.

Dividend Stocks to Buy: Cisco Systems (CSCO)

Dividend Yield: 3.3%
Dividend Cycle: January/April/July/October

It is hard to imagine today’s global high-speed Internet without Cisco Systems, Inc. (NASDAQ:CSCO). These guys make all the complex hardware that forms the backbone of modern telecommunications.

Cisco specializes in providing end-to-end solutions that include Switching (32% of sales), Routing (14%), Collaboration (9%), Data Centers (7%), Video Service Provider (7%), Wireless (5%), Security (4%), Services (22%) and some other stuff (1%). You get the idea; Cisco does it all. Some or all of these items can be found anywhere in the world you access the internet. It all adds up to about $50 billion in business.

Cisco Systems was once the Cinderella story of technology, churning out quarter after quarter of high double-digit growth by selling more equipment to first time corporate customers and upgrading to newer faster speeds for data hungry businesses. The breakneck growth has slowed in recent years but there is still much to be done.

Services, about half of the business, are important. They provide predictable recurring revenues and lots of cash flow.

Last year, operations generated $13 billion, bringing total cash in Cisco’s bank up to $63 billion. Even a huge acquisition would still leave room for growing dividends. This explains why Cisco ranks very high in terms of dividend safety and growth.

Cisco also ranks well in yield. The current $1.04 per share payout offers a 3.3% yield — a pretty robust payout for a tech company.

Lastly, CSCO trades at just 12 times future earnings — far less than the broader S&P 500 — while offering reasonable earnings growth prospects and a superior dividend yield.

Dividend Stocks to Buy: Merck (MRK)

Dividend Yield: 3%
Dividend Cycle: January/April/July/October

Merck & Co., Inc’s. (NYSE:MRK) $40 billion in global revenues places it in the No. 5 position in the pharmaceutical industry. But in terms of mix, the 88% of revenue coming from human drugs ranks MRK the highest. The rest comes mostly from veterinarian medicines.

MRK is devoted to discovering or acquiring blockbusters drugs with its top 10 products accounting for 47% of its global business. Here are a few of the largest drugs: cardio vascular (Zetin), diabetic (Januvia), HIV (Isentress) respiratory (Singulair), and Immunology (Remicade).

Merck stands out in a research-intensive and highly competitive field. About $7 billion is invested annually in the search for new drug formulations. This approach requires years of time and few products ultimately make it to the FDA for approval, resulting in high barriers to entry.

The demand for healthcare isn’t sensitive to the economy, either. It keeps going up year after year as the population continues to age. That’s good because it makes for stable and predictable demand.

Merck’s business generates well-above-average operating margins and free cash flow and will likely continue to do so for many years. Its bank account holds a tidy $12 billion, so the company has plenty to finance an acquisition or to weather most any storm.

The current $1.84 per share payout offers an above-average 3% yield. The current payout ratio is 53% of free cash flow, providing plenty of flexibility with the dividend.

Dividend Stocks to Buy: Toronto-Dominion Bank (TD)

Dividend Yield: 3.9%
Dividend Cycle: January/April/July/October

Toronto-Dominion Bank (NYSE:TD) is Canada’s second largest home grown bank ranked on the basis of its $812 billion in assets. Toronto-Dominion Bank was founded in 1855 and is headquartered in Toronto, Canada. The organizational chart has three components: Canadian Retail, U.S. Retail and Wholesale Banking:

  • Canadian Retail (64% of sales) provides a full range of financial products and services to customers including credit cards, auto finance, wealth, and insurance businesses to nearly 15 million customers at 1,165 branches, 3,153 ATM’s.
  • U.S. Retail (26%) is carried out by TD Bank offering auto financing services, and wealth management services to over 8 million customers through 1,298 branches ATM machines.
  • Wholesale Banking (10%) includes a wide range of capital markets and investment banking under the TD Securities name.

Toronto-Dominion’s basic customer looks to the company less as a traditional place to deposit their paycheck and more as a combination bank and securities broker. Even so, interest income accounts for about 65% of the banks total income, making TD every bit as influenced by interest spreads as any plain vanilla bank.

TD’s dividend appears to be very safe (it was even maintained during the financial crisis), but its interest rate exposure and financial leverage make its free cash flow more volatile to economic cycles. The company targets a payout ratio between 40% to 50%, which is reasonable.

The current $1.69 per share payout offers investors a nearly 4% yield. A regular quarterly dividend has been paid for more than 20 years, with the dividend compounding at 9.3% per year over the past 10 years.

Dividend Stocks to Buy: Verizon (VZ)

Dividend Yield: 4.5%
Dividend Cycle: February/May/August/November

Verizon Communications Inc. (NYSE:VZ) is part of Warren Buffett’s dividend portfolio and a favorite income play for many conservative investors.

It seems like the whole world has gone mobile, and Verizon is one of the top players.

The operating segment it calls Wireless represents the lion’s share of business at 70% of sales and 93% of operating income. Wireline brings in the remaining 30% of revenues and 7% of income. VZ’s newest service “One Call” assigns customers a single number for wireline and wireless and could eliminate any distinction between these segments sometime in the future.

Within these two categories resides a vast array of products and services from voice and data services broadband video, corporate networking and security solutions.

Verizon is a highly diversified giant providing service to over 112 million U.S. customers. VZ’s greatest strength is it wireless business where, it is ranked No. 1 in service coverage and call quality. Building and maintaining wireless networks is extremely capital-intensive and requires hard-to-replicate assets such as spectrum.

Verizon controls an important pipeline to the customer but has shown interest in entertainment content through its acquisition of AOL several years back. The company took a further leap in July announcing an agreement to buy one of the internet’s well-known brands, Yahoo! Inc. (NASDAQ:YHOO). These moves also could be recognition of the inevitable slowing of other VZ businesses.

Over the past 10 years, annual dividend growth has averaged 4.4%, with a 3.6% growth rate in the past five years.

Verizon pays out a conservative 50% of earnings while retaining ample reserves for capital expenditures or acquisitions. The proposed Yahoo acquisition should not change things. VZ will gain $5 billion from the Yahoo balance sheet after forking out $5 billion in its own cash to close the deal.

Nice deal for shareholders if VZ can leverage Yahoo’s content.

Dividend Stocks to Buy: Procter & Gamble (PG)

Dividend Yield: 3%
Dividend Cycle: February/May/August/November

Proctor & Gamble Co (NYSE:PG) is the marketing king of household and personal care products. No company spends more on consumer research, product development and brand advertising than P&G. One of its earliest products, Ivory Soap, is over 100 years old.

Product segments include Laundry and Household Cleaning (32% of sales), Baby, Feminine and Family Care (29%), Beauty (18%), Grooming (10%) and Healthcare (11%). Business outside the U.S. in 180 countries equals over 60% of revenue.

Investors should note that P&G is in the middle of a meaningful business transition that will focus the company on a smaller number of brands and categories.

The P&G philosophy of market dominance is especially intense in the highly competitive retail grocery drug and mass merchandise space. While there are many entrants, few have the power of the world’s largest advertising and promotion budget.

In a recession, consumer brand names like Tide, Pampers, Crest and Gillette are great to have in the portfolio. In past times, consumers have stretched the budget by trading down to private label. But the superior performance of these leading P&G products and the exceptional brand loyalty helps to insulate the impact of budget stretching (the company’s sales were only down 3% during the financial crisis).

P&G is a dividend machine sending out checks in every one of the last 124 years. In each of the last 58, there have been dividend increases, qualifying the company as a dividend king.

Dividend Stocks to Buy: AT&T (T)

Dividend Yield: 4.8%
Dividend Cycle: February/May/August/November

Looking at AT&T Inc. (NYSE:T) from the outside can be misleading. Yes, it is a diverse array of communication services neatly packaged into buckets like Business Solutions at 49% of sales, Entertainment Group (24%), Consumer Mobility (24%) and International (3%).

A closer look, however, reveals that more than half of AT&T is about providing communication and entertainment to people on the move, combining things like phone and Internet with last year’s acquisition of DirecTV.

AT&T is truly everywhere.

Owning T stock offers access to multiple streams of subscription revenues. The churn rate, or customer loss ratio, is extraordinarily low in the mobile phone, internet and DirecTV businesses. This makes predicting the future far easier than most businesses.

AT&T’s Telecom and Entertainment businesses play in industries comprised of giants. The cost of entry to this club is enormous. The past three decades has been marked by consolidation of the major industry players. No doubt this will continue as sectors like wireless and entertainment mature.

Studying a company’s balance sheet is critical to gain an understanding of its dividend safety. Businesses will always make debt payments before distributing dividends, and companies with too much debt can be at greater risk of dividend cuts if financial results unexpectedly deteriorate.

AT&T’s balance sheet is a little stretched following its DirecTV acquisition, but the company still has $7.2 billion in cash, and long-term debt is a reasonable 49% of total capital. AT&T’s stable free cash flow should allow it to improve the balance sheet over the next few years.

The shares offer nearly 5% in yield. The $1.92 per share dividend was last increased at year-end 2015, and we would expect another gain this year as well. The prospective dividend is likely to range between $1.96 and $2 per share, representing modest growth. However, AT&T’s dividend growth has sure been consistent with more than 30 consecutive years of increases.

Dividend Stocks to Buy: Wells Fargo (WFC)

Dividend Yield: 3.3%
Dividend Cycle: March/June/September/December

Wells Fargo & Co. (NYSE:WFC) is going to raise a lot of eyebrows thanks to the scandal over some 2 million unauthorized accounts opened on customers’ behalf. However, R.W. Baird thinks the selling is overdone, and so do I. Here’s why Wells Fargo still belongs in a long-term income account:

Wells Fargo ranks third in assets and second in the market value of all U.S. banks. Its familiar stagecoach logo shows up on over 13,000 ATMs and 8,700 branch locations in the U.S. and in 36 other countries. Some 53% of income comes from the net spread between WFC’s borrowing costs and lending income, and the remaining 47% comes from a diverse group of fees for things like trust and investments, credit cards,and mortgages.

No single group amounts to more than 15% of the total pie at WFC, highlighting the bank’s diversification.

During the financial crisis, WFC revenues declined 4% — less than the average for major U.S. banks. Since then, the share of non-interest income has risen and return on invested capital has fully recovered. This is the benefit of a diverse business base and a measure of control over costs and cash flow.

The company’s management is thought to be one of the most conservative groups in the industry, and it’s no surprise why Warren Buffett has invested heavily in the business.

WFC was forced to reduce it dividend during the financial crisis but has since recovered, reaching record levels last year. The payout ratio is just 37% of earnings and 67% of free cash flow. Considering the company’s stronger capitalization and diverse business mix, even in the face of headline trouble, Wells Fargo’s dividend looks very safe.

Dividend Stocks to Buy: Target (TGT)

Dividend Yield: 3.5%
Dividend Cycle: March/June/September/December

Since its 1902 founding in Minneapolis, Target Corporation (NYSE:TGT) has grown to become the nation’s second largest retailer behind Wal-Mart Stores, Inc. (NYSE:WMT). With nearly 1,800 stores located just about everywhere in the U.S. that you can imagine, TGT generates $74 billion in revenues.

Today, Target is a mature retailer with annual revenue growth averaging less than 2% per year. However, strong operating and financial management have produced five-year annual growth of 5.8% in diluted earnings per share and nearly 10% in free cash flow. This is a sign that TGT is smoothly adjusting to its mature status and continuing to throw off substantial free cash flow that can be used for dividends.

Online shopping is rapidly changing the face of traditional retailing. Target has adapted in a timely manner with Target.com but could face an uphill battle as Amazon.com, Inc. (NASDAQ:AMZN) remains a threat.

Online retailing requires lots of investment in logistics, but this still costs less than building new stores. This could spell good news for TGT cash flow and dividend paying capabilities.

Target is a safe income play for dividend investors. The current $2.40 per share dividend offers investors a yield of 3.5%. Target has paid uninterrupted dividends since 1967 and rewarded shareholders with more than 40 consecutive years of payout increases. Over the past five years, TGT has raised its dividend by nearly 20% annually.

The annual payout of $2.40 represents 42% of earnings and 45% of free cash flow. The existing store base is highly profitable with return on invested capital at 13%. The company’s balance sheet also is in reasonable shape with over $1 billion in cash on hand.

Dividend Stocks to Buy: Exxon Mobil (XOM)

Dividend Yield: 3.5%
Dividend Cycle: March/June/September/December

Rooted in the 1870s, Exxon Mobil Corporation (NYSE:XOM) is the largest energy company in the world and boasts a sterling record of stability and growth. The business touches virtually every region of the world and breaks down into three segments: Downstream (44% of sales), Upstream (29%) and Chemical (27%).

Wherever oil is streaming, you will find Exxon Mobil.

The price of crude oil is the key for virtually all energy companies, and Exxon is no exception. However, some insulation is provided by XOM’s diverse resource base and integrated operations — lower input prices for oil benefits Exxon’s petrochemical business, helping hedge weakness in upstream operations.

While crude oil remains at depressed prices, XOM is arguably the best house in a bad neighborhood. Its strong credit ratings, low cost of production and massive operations position it to outlast its peers.

Exxon started paying dividends in 1911 and has increased the payout in every one of the past 34 years. Earnings have been cut in half lately due to the slump in energy prices. However, profits are expected to rebound sharply this year, which should move the payout ratio back below 100%. Until then, Exxon Mobil will continue cutting costs and taking on debt to finance its business.

Dividend growth likely will remain below the 10.6% average annual rate of the past five and 10 years until oil prices recover. That’s OK.

Forecasting earnings based on the price of any commodity can be risky. So just in case oil prices take another dip, XOM can take advantage of it low 25% long-term-debt-to-total-capital ratio to keep the 34-year dividend growth record going.

As of this writing, Simply Safe Dividends was long CSCO, PG, VZ, WFC and XOM.


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/9-dividend-stocks-full-calendar-safe-income/.

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