5 Safe Dividend Stocks to Watch in May 2017
Safe Dividend Stocks for May 2017
Dividend-paying stocks are a great way to generate an income without selling your shares of a company. Based on time, patience, stock price gain, and income, dividend investing can add greatly to your overall return.
I would say that income and capital gain returns go hand in hand. For instance, if a stock can continue its steady or growing payout, more investors will consider the company over one that is cutting or eliminating its dividend. Therefore, businesses with strong payouts have a higher probability of their shares being bid up.
The focus of this article is on narrowing down key factors to consider when choosing a dividend-paying stock. I also present an in-depth analysis of the best companies that would be considered safe dividend stocks, some of which have even increased their dividends. So, read on for some of the best safe dividend-paying stocks to watch in May of 2017.
3 Things to Know About Companies That Pay Out a Dividend
Each investor who owns dividend-paying stocks may have different investment plans. For instance, you may use your dividend income to purchase more shares of the same company that paid you the dividend, while another plan may be to add a new position to your portfolio or look to fund your retirement.
No matter what your goals are, the most important thing to consider is the safety of the dividend.
Below are three things to know before deploying your capital into a dividend-paying stock.
1. How Much Is Being Paid Out?
Any company that pays out a dividend has something known as a payout ratio. This represents how much of the dividend is taken from earnings.
For example, let’s say a company earns $2.25 annually per share, from which an annual dividend of $1.10 is paid out. This would result in a payout ratio of 48% ([$1.10 ÷ $2.25] × 100%). The remainder of the earnings are kept within the company.
The ideal companies are those that pay out less than 100% from their earnings. For instance, let’s say the above company paid out $2.50 in a dividend instead. This would put the payout ratio at 111% ([$2.50 ÷ $2.25] × 100%). However, this would not be sustainable, because the company is not earning enough revenue to cover the dividend. Also, this wouldn’t allow for any reinvestment back into the business.
As you can see, it is important to take a look at stocks that have a payout ratio below 100%. I would also recommend taking a look at past trends to ensure that the company can continue to both grow and reward shareholders.
2. Debt Obligation
A company’s corporate financial structure typically gets split into two parts: equity and debt.
Equity represents the shares of the company that are trading on the trading exchanges. The dividend, if any, would be based in part on the equity.
As for debt, it is typically held in the form of bonds. Bonds are basically a loan with a set interest rate that must be paid back by a certain date. Investors’ income is based on the interest payments made by the company.
It is important to understand debt and equity because there is a major difference in the payment structure when one is used for the sake of investors. Namely, a company is obligated to pay bondholders before equity investors, meaning the dividend is in the hands of management, and a large debt could impact future payments.
To determine if the debt loan is being used wisely or if it could impact the dividend negatively, go by the debt-to-capital (D/C) ratio. It is calculated by taking the company’s debt and dividing it by its total capital. Most the time, this ratio can be found alongside the business’s other fundamental valuations.
When the ratio is 50% or greater, it means the company has a very large and potentially harmful debt load, which may require the company’s earnings to pay it off, and business risks being taken in order to reduce the debt faster. When the D/C ratio is below 50%, it implies that the debt is in control and is being used smartly for the sake of growth.
3. Understand the Business
It is important to understand what you own and how a company generates its revenue. This means taking a look at the services and goods that are sold by the company.
Reading a company’s profile is a great way to understand the business. However, I would take it one step further and also attempt to explain it to a non-investor. If they fully understand the business model after you have explained it, then maybe take a deeper look at the company. But if the non-investor is not grasping the business model, then it’s too complicated and maybe it is best to stay away.
Below is a list of safe dividend-paying stocks you may wish to consider. Everything that has been mentioned above is factored into the dividend-paying stocks that have made this list.
List of Safe Dividend-Paying Stocks
|Fortress Investment Group LLC||FIG||$8.03||4.48%|
|Exxon Mobil Corporation||XOM||$81.26||3.79%|
1. Fortress Investment Group LLC
Fortress Investment Group LLC (NYSE:FIG) is an investment management firm which works with the likes of private equity funds, hedge funds, and credit funds.
The dividend from FIG stock is paid on a quarterly basis and has increased by 50% since 2013. But the quarterly dividend is not the only way that shareholders have been rewarded; over the past three years, they have also received a special dividend using surplus cash.
This special dividend was possible in part due to Fortress’s payout ratio of 36%; for each dollar of earnings, $0.36 is paid out as a dividend. Another reason is the company’s low debt load, reflected in its D/C capital ratio of 18%.
All this is possible due to the growth of the business. Since Fortress is engaged in managing clients’ money, the most important number is the assets under management, which is the amount of money being managed. The larger this number is, the better for investors, since it means more fees being charged to clients. Over the past 10 years, the assets under management have grown more than 600%. (Source: “Fortress Overview,” Fortress Investment Group LLC, last accessed April 27, 2017.)
Fortress has room for growth, given that its market cap size is smaller than its peers.
Buckle Inc (NYSE:BKE) is a retailer of casual apparel and footwear which operates in 44 states across the United States. The company has been in business for more than 50 years, and has shown itself capable of changing to meet the current retail environment.
At this time, roughly one-third of every dollar of the company’s revenue is being generated from the online side of its business. Over the past couple of years, that number has been growing, as have the margins, which are higher than Buckle’s physical stores. (Source: “The Buckle, Inc. Reports Fourth Quarter and Fiscal Year 2016 Net Income,” Buckle Inc, March 10, 2017.)
Buckle is very shareholder-friendly, as evidenced by the dividend payments. These are reviewed annually, and the trend has been to increase the payout, as well as to pay out a special dividend. The pattern of the special dividend has been to either match or pay out a higher dividend when compared to the accumulated quarterly dividend.
3. Qualcomm, Inc.
Qualcomm, Inc. (NASDAQ:QCOM) is engaged in the global business of digital communications technology. So why be bullish on Qualcomm? Here are three reasons.
First is its sales and revenue numbers, which are up 23% over the past five years. When digging deeper into these numbers, one very important factor is the expansion of the margins. This just means that, over time, the company is retaining more money after paying for business expenses. (Source:”Qualcomm Inc.,” MarketWatch, last accessed April 27, 2017.)
Second is the company’s balance of approximately $28.9 billion in cash or cash equivalents. This represent a third of the market cap of the company. Such a large amount can be used for the likes of acquisitions or expanding into a new market sector. (Source: “Qualcomm Announces Second Quarter Fiscal 2017 Results,” Qualcomm, Inc., April 19, 2017.)
Third is Qualcomm’s dividend, which has increased every year for the past 14 years. Special dividends have also been paid out; while the exact amount is difficult to determine, the current annual dividend to all shareholders amounts to just north of $3.0 billion. The cash balance represents more than nine times this amount.
4. Domtar Corp.
Domtar Corp (NYSE:UFS) designs, manufactures, and distributes fiber-based products. These are used for various goods, such as packaging paper, softwood, hardwood, and personal care products.
Over the past five years, reported revenue has been flat. However, when investing, the focus is always on the present and future, not the past. Looking at the future estimated earnings for UFS stock, the trend is on a upward slope, with year-over-year earning growth and sales and margins expected to increase.
In addition to boosting the stock price, this means the dividend should be safe. The dividend could increase, but in the meantime, a yield of 3.96% can be earned, based on the trading price of $41.88.
5. Exxon Mobil Corporation
Exxon Mobil Corporation (NYSE:XOM), operating as ExxonMobil, is one of the largest energy companies in the world, with assets in the U.S., Canada, Europe, and Asia.
Typically, oil companies are considered very volatile, driving away many investors. However, ExxonMobil is very unique in this regard. Let me explain.
XOM stock pays a dividend on a quarterly basis, with an increase tending to occur every April, as part of the company’s annual review. The year 2017 marked the 35th year that the dividend has seen an increase.
And there appears to be no end to this trend in sight. XOM stock boasts a payout ratio of 80%. This ratio means that the company has flexibility to increase the dividend and/or retain earnings for internal use.
Future dividend hikes are also supported by the price of oil, which is off its recent 2014 highs. The stock is currently trading at approximately half of what it was in 2014 and, recently, it seems to have begun building a price base. And, as the price of oil of increases, ExxonMobil’s margins increase as well, boosting income and the stock price.