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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| April 3, 2020
The longest bull market in history has blown up in spectacular fashion, thanks to the coronavirus pandemic that has shut economic activity all around the world. As a result, investors have been sent scrambling to find the safest dividend stocks to buy.
Stocks are reeling, interest rates are plumbing the depths and the specter of defaults and bankruptcies are on the horizon. Income investors now more than ever need to be able to trust their dividend stocks. Hefty yields do no good if a company cuts or suspends its payout. By the same token, even the slimmest yield is immensely valuable if there's little to no chance it will come under duress.
In short, income investors need super safe dividend stocks right now, and we know some good ways to find them.
One option is to monitor the DIVCON system from exchange-traded fund provider Reality Shares. DIVCON's methodology uses a five-tier rating to provide a snapshot of companies' dividend health, where DIVCON 5 indicates the highest probability for a dividend increase, and DIVCON 1 the highest probability for a dividend cut. And within each of these ratings is a composite score determined by cash flow, earnings, stock buybacks and other factors.
These are 15 of the safest dividend stocks to buy right now. Each stock has not only achieved a DIVCON 5 score, but a composite score within the top 10% of all stocks that DIVCON evaluated. This makes them the crème de la crème of dividend safety – and more likely to keep the dividend increases coming going forward.
Stock prices and other data is as of April 3 unless otherwise noted. Stocks are listed by DIVCON score, from lowest to highest. The list of Dividend Aristocrats is maintained by S&P Dow Jones Indices. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price.
Market value: $194.9 billion
Dividend yield: 3.3%
DIVCON score: 65.00
Coronavirus could mean deep trouble for retailers forced to lock their doors. Happily for investors in Home Depot (HD, $181.31), the nation's largest home improvement chain has been deemed an essential business. Not only are its stores open, but they're doing brisk business. One of the few things you can do when trapped at home is to fix the place up.
Indeed, Nomura Instinet analyst Michael Baker, who has a Buy rating on HD shares, writes to clients that home-center trends are holding up "reasonably well in the new near-term normal."
Home Depot is a longtime dividend payer that has raised its payout annually since 2010. And the yield on the dividend is pretty darn good in a world where interest rates are at record lows.
The Dow stock generates more than twice as much levered free cash flow (cash a company has left over after it meets all its obligations) than it needs to support that payout, according to DIVCON's data. Indeed, for the 12 months ended Feb. 2, HD had levered free cash flow of $8.5 billion after disbursing $6 billion in dividends. That puts Home Depot among a small set of safe dividend stocks to buy now in the retail space.
Market value: $195.0 billion
Dividend yield: 3.2%
Like a number of health-care names, shares in Merck (MRK, $76.873) have held up comparatively well during the market crash. The Dow Jones Industrial Average component is off about 6% since the market topped in February. The S&P 500, by comparison, tumbled 25%.
The resilient share price has thus far limited upside on Merck's dividend yield. At 3.2%, it remains fairly generous but certainly not eye-popping. However, what's more important than yield these days is safety, and Merck has that in spades.
On a fundamental level, Merck can count on Keytruda – a blockbuster cancer drug approved for more than 20 indications – to keep the cash coming. And it's partly thanks to the hit drug that Merck has such a solid balance sheet and cash flow situation. Not only does MRK have more than $10 billion in cash in its coffers, but it also generates twice as much levered free cash flow than it needs to support its payout. That's encouraging.
Market value: $40.1 billion
Dividend yield: 1.2%
Sherwin-Williams (SHW, $436.91) is one of the largest paints, coatings and home-improvement companies in the world, and it also happens to be one of the market's most reliable dividend payers. Indeed, SHW is a member of the S&P Dividend Aristocrats, an elite group of 64 dividend stocks that have raised their payouts annually for at least a quarter-century.
SHW has 41 straight years of annual increases to its name and DIVCON data suggests it won't break the streak anytime soon. The paint company generated levered free cash flow of $1.13 billion in 2019 – or three times as much cash as it needed to support $421 million in dividend payments.
In another sign of dividend strength, SHW's payout ratio is about only 24%. That means the company's dividends come to less than a quarter of its profits. The chintzy yield might not wow income investors, but they can take comfort in its reliability.
Better still: Sherwin-Williams is actually earning analyst upgrades right now. Goldman Sachs' Robert Koort, for instance, raised the stock from Neutral to Buy on March 30 and put the stock on his firm's Conviction List. Koort notes that declines as deep as the current 26% plunge are rare for SHW, especially amid declining input costs and low housing inventory. That makes this safe dividend stock a "unique long-term opportunity."
Market value: $87.5 billion
Dividend yield: 2.4%
DIVCON score: 65.25
Linde (LIN, $164.09) is another Dividend Aristocrat, having gained entry to that illustrious list of safe dividend stocks as a result of its merger with Praxair two years ago. Taking the Praxair streak into consideration, the world's largest industrial gasses company has hiked its payout annually, without interruption, for 26 years.
Shares in Linde have sold off just about as much as the S&P 500, which means new investors can get a significantly higher yield than in the recent past. LIN's dividend was stuck below 2% for more than a year. It touched a low of less than 1.6% at one point in February.
To be sure, Linde is vulnerable to the global economic shock set off by COVID-19. Analysts expect organic revenue, which excludes contributions from acquisitions, to be flat for the next five years. But more than ample free cash flow and a payout ratio of 48% gives the company plenty of breathing room for future dividend growth.
Goldman's Koort views Linde similarly to Sherwin-Williams, upgrading the stock from Neutral to Buy and saying this is an "attractive opportunity" in a "high-quality defensive name."
Market value: $12.9 billion
DIVCON score: 66.25
W.W. Grainger (GWW, $239.69) is something of a sleepy company, but investors best not sleep on its dividend. The company – which not only sells industrial equipment and tools, but provides other services such as helping companies manage inventory – has hiked its payout annually for almost 50 years.
In addition to being an Aristocrat, GWW is on sale these days and offers a great way to take advantage of a rebound when we get to the other side of the crisis.
"In 2021, we expect sales will get a boost from pent-up demand and larger distributors investing in inventory," says William Blair Equity Research, which rates the stock at Outperform (equivalent of Buy). "Owning distributors is a safe way to participate in the industrial recovery, but not get killed if the economy gets worse. Grainger's valuation is attractive."
Grainger's strong cash position puts it among a number of safe dividend stocks to buy now. Analysts add that GWW will probably raise its dividend to keep its 48-year streak intact.
Market value: $1.2 trillion
Dividend yield: 1.3%
DIVCON score: 66.75
Microsoft (MSFT, $155.26) is off 18% since hitting an all-time high in February, and it remains the world's largest publicly traded company. The trillion-dollar-plus market value, massive amounts of cash on the balance sheet and gushers of free cash flow make this one of the safest dividend stocks to be found.
MSFT generated $35.1 billion in levered free cash flow for the year ended Dec. 31. Meanwhile, its cash pile grew to $134.2 billion. And that's after paying $14.4 billion in dividends. DIVCON notes that the tech giant delivers two-and-a-half times the free cash flow it needs to cover the dividend.
Microsoft also has an impressive streak of dividend hikes, having raised its payout annually for more than 15 years.
Deutsche Bank recently reiterated its Buy call on MSFT, but the analyst outfit concedes that demand will take a hit as the recessions slows the rate of companies' migration to cloud-based services. In fact, it's extremely difficult to find analysts willing to bet against Microsoft. Over the past three months alone, the stock has piled up 25 Buy calls versus just one Hold and no Sells.
Market value: $32.4 billion
Dividend yield: 0.7%
DIVCON score: 67.00
Roper Technologies (ROP, $305.07) is another Dividend Aristocrat, having raised its payout annually for 27 years. Although the yield on the dividend is a paltry 0.7%, it can be counted on during these turbulent times.
Roper is an industrial company whose businesses include medical and scientific imaging, RF technology and software, and energy systems and controls, among others. A combination of acquisitions, organic growth and stronger margins have helped Roper juice its dividend without stretching its profits. The company has a payout ratio of only 16% that not only indicates a safe payout, but plenty of room for growth.
Even better, Roper has far more levered free cash flow than it needs to pay the dividend. The company generated $1.5 billion in free cash flow last year while paying out $191 million in dividends.
Market value: $13.0 billion
Dividend yield: 0.9%
DIVCON score: 67.25
Domino's Pizza (DPZ, $333.45) was one of the best stocks of the recently departed bull market's 11-year run and now it's one of the best stocks in the crash. Shares in the sprawling pizza chain are up about 12% since the market topped in February. The S&P 500 is down 25% over the same span.
Domino's dividend, which it began paying in 2014, has never been all that juicy, spending most of its time in sub-1% territory. It can, however, be counted on.
DPZ is one of the safest dividend stocks to buy now if only because its business is positioned to benefit from this difficult scenario. With so much of the world stuck at home hiding from COVID-19, Domino's business is booming. At the same time, the pizza joint generated $278 million in free cash flow for the 12 months ended Dec. 31, while paying out $106 million in dividends. And it finished 2019 with $191 million in cash and short-term investments.
"Despite headwinds, we continue to view DPZ as among the best positioned in this environment," writes Credit Suisse, which rates the stock at Market Outperform (equivalent of Buy).
Market value: $228.1 billion
Dividend yield: 1.8%
DIVCON score: 67.50
UnitedHealth Group (UNH, $240.44), the largest publicly traded health insurance company by a wide margin, might not boast the highest dividend yield, but it is one of the safest.
UNH, a component of the Dow Jones Industrial Average, has tumbled in line with the broader indices since the bull market died in February. But ample cash flow and a strong balance sheet won't allow the same sort of disappointment with the dividend.
UnitedHealth generates more than five times as much levered free cash flow than it needs to support the dividend, DIVCON notes. Heck, the health insurer generated $3.6 billion in free cash flow in the fourth quarter alone – a time when it paid out $1 billion in dividends. UNH's dividend strength is also evidenced by its payout ratio, which stands at just 26%. The payout ratio of the S&P 500 is more than 40%.
What's less clear is how the outbreak of COVID-19 will affect revenue in the near term as hospitals defer elective procedures so they can concentrate on pandemic treatment. Regardless, Credit Suisse maintains its Outperform rating.
"We continue to believe that investors will tend to stick with market leading companies such as UNH as this crisis unfolds and, therefore, maintain our favorable investment rating on the stock," Credit Suisse analysts write.
Market value: $348.8 billion
Dividend yield: 0.8%
DIVCON score: 67.75
Visa (V, $157.39) is among some awfully safe dividend stocks to buy now, even though it will never blow away income investors with its yield. But aggressive dividend growth will help investors' yield on cost grow over time and contribute to what should be strong total returns.
The world's largest payments network is a popular stock pick with mutual fund managers, hedge fund managers and Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B). That's because its global breadth makes Visa an ideal way to play explosive growth in cashless transactions and digital mobile payments.
Visa has more than a decade of annual dividend increases to its name and investors can expect that streak to continue. The transactions company has a payout ratio of just 21%. According to DIVCON, Visa generates more than five times as much free cash flow as it needs to support the dividend. (Visa generated more than $9 billion in levered free cash flow last year.)
And then there is the imprimatur of Warren Buffett, who makes no secret of his ardor for collecting dividends – even if he refuses to allow Berkshire to pay one. BRK.B owns more than 10 million shares in Visa worth about $1.6 billion.
Market value: $39.7 billion
DIVCON score: 68.25
Humana (HUM, $300.11) is another dividend payer with a firehouse of free cash flow compared with what it spends on dividends. The health insurance company doled out $291 million in dividends last year and still had $2.3 billion in free cash flow left over.
Humana fortified its coffers in March by selling $1.1 billion in senior secured notes. The company intends to use the net proceeds from the offering for general corporate purposes, which may include the repayment of existing indebtedness.
With interest rates plumbing fresh lows, refinancing is just good thinking.
Although the suspension of many elective surgeries adds a measure of uncertainty to the company's revenue growth rate, Humana is doing its part in the battle against COVID-19. The firm has waived out-of-pocket costs regarding coronavirus-related treatment for its members. (Credit Suisse notes that elective procedures are a small fraction of spend.) On the other hand, patients requiring ventilator support could be costly over the short term, analysts say.
Humana also has a short but encouraging track record of dividend growth, with a decade of payout hikes under its belt.
Market value: $22.7 billion
Dividend yield: 3.7%
DIVCON score: 68.5
Asset managers such as T. Rowe Price (TROW, $97.14) are losing market share to indexed funds of the type Vanguard offers, but the company still boasts $1.2 trillion in assets under management. And thanks to advising fees, analysts expect revenue to tick up to $5.7 billion in 2020 from $5.6 billion last year.
As for the security of its payout, TROW is yet another Dividend Aristocrat, having lifted its payout every year for 34 years. The last hike came on Feb. 2, when it raised the quarterly dividend 18% to 90 cents a share from 76 cents a share. The payout ratio of 45% is essentially in line with that of the broader market.
DIVCON notes that TROW has more than twice as much levered free cash flow as it needs to support the dividend.
Market value: $17.2 billion
Dividend yield: 1.5%
DIVCON score: 69
Cintas (CTAS, $165.19) is a Dividend Aristocrat with more than three decades of annual dividend increases. However, although the payout looks safe, the top line might very well take a hit in the months ahead.
CTAS is perhaps best-known for providing corporate uniforms, but the company also offers maintenance supplies, tile and carpet cleaning services and even compliance training. As such, it's seen by some investors as a bet on jobs growth.
With workers being laid off in the millions and the unemployment rate forecast to top 10%, labor market growth doesn't look like a particularly good bet these days. However, its facility services division – basically, things such as cleaning offices and restocking restroom supplies – could see bolstered interest.
Regardless of how the jobs market is doing, Cintas is a stalwart as a dividend payer. The company has raised its payout every year since going public in 1983, and it has the wherewithal to keep the streak alive. Cintas' payout ratio comes to just 32% of profits, and the company generates almost four times as much levered free cash flow as it needs to support its payout.
Market value: $240.1 billion
DIVCON score: 69.75
Like Visa, Mastercard (MA, $238.88) is a sprawling global payments processor in prime position to benefit from the growth of digital mobile payments and other cashless transactions.
Shares in Mastercard tumbled when the spread of COVID-19 amped up worries about global growth. After all, Mastercard depends on transaction volume for revenue. But those fears may be misplaced. Company insiders sure think so and they're backing up their optimism with cash. Mastercard has seen active insider buying recently – a bullish sign.
While Mastercard is one of the safest dividend stocks to buy right now, its dividend yield is slim. But MA is good for the payouts. The firm generated $65 billion in levered free cash flow last year after paying $1.3 billion in dividends.
Income investors can also take heart in the fact that Warren Buffett's Berkshire Hathaway owns almost 5 million shares worth about $1.2 billion.
Market value: $5.3 billion
Dividend yield: 1.7%
DIVCON score: 71.5
No dividend stock gets a higher safety score from DIVCON than Dolby Laboratories (DLB, $52.98). Dolby is a leader in audio, visual and voice technologies for cinemas, home theaters, PCs, mobile devices and games.
B. Riley FBR equity research, which rates DLB at Buy, says the probability that the company will cut the dividend is zero. Dolby Laboratories can "push through any potential spending slowdown" because Dolby Vision and Dolby Atmos systems have become "de facto standards" for home theaters, cinemas and audio surround sound, they write.
The dividend yield of 1.7% is nothing to sneeze at when interest rates are plumbing the depths, especially when investors can bank on it. Dolby generates more than twice as much levered free cash flow than it needs to support the dividend. The payout ratio stands at just 34%, and DLB has hiked the dividend annually for six straight years. All this is good enough to put it atop this list of safe dividend stocks to buy now.