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The safest dividends in the world

Sunday - 9/9/2012, 1:28pm  ET

In a world of economic turmoil and low interest rates, investors are often looking for ways to generate solid returns with minimal risk.  Within the stock market, there is arguably no less risky pool of stocks than the 2012 list of dividend aristocrats, a group of 51 companies that have each increased dividend payments for at least 25 consecutive years.  I recently wrote about four of the newcomers to this list, but there is another subset of this list that I'd like to bring to your attention with the goal of finding the safest of the safe dividend stocks on the list. 

Of these 51 companies, only 5 have a TTM dividend yield of over 1% and a payout ratio of less than 25% per DRIP Investing’s online resources.  These companies are: Exxon Mobil , Aflac , Family Dollar , Cintas and Sigma-Aldrich .

Here is a look at the strong health of each company (and its dividend!):

  XOM AFL FDO CTAS SIAL
 CAPS Rating  5 stars 5 stars 3 stars 4 stars 4 stars
 Share Price  $87.33 $45.88   $63.35 $40.51 $70.85 
 Market Cap (in billions)  $409.6 $22.0  $7.4  $5.2  $8.7 
 TTM Dividend Yield  2.6% 2.8% 1.3%  1.3%  1.1% 
 TTM Payout Ratio  21% 24%  21%  24% 20% 
 10-year Dividends Per Share  $15.16 $7.90  $4.83  $4.06 $4.96 
           
 1-year Stock Performance  24.7% 35.3% 25.8%  36.9% 16.7% 
 10-year Stock Performance  160.5% 56.3%  126.3%  -3.5%  186.6% 
           
 TTM Revenues (in billions)  $434.8  $24.1 $9.1  $4.1  $2.6 
 TTM Operating Margin  11.4% 17.0% 7.6% 13.2% 26.2%
 TTM Price / Earnings  9.35 8.57  17.84  18.24  19.16 
 Forward Price / Earnings  10.97 6.83  15.01  14.84  17.03 
 Price / TTM Sales  0.93 0.89 0.81  1.25  3.34 
 TTM Levered Free Cash Flow Yield  3.8% 18.5% -1.8%  6.4% 4.3%
           
 Price / Book Ratio  2.48 1.51 5.64  2.40 3.63 
 Debt / Equity Ratio  0.09 0.27  0.41  0.60  0.32 
           
 Source: Yahoo! Finance on September 6, 2012         
 
Are Safe Dividends Too Boring?
 
Dividend yields less than 3% don't sound exciting on the surface.  However, the focus of this analysis is to identify a list of companies that have a strong record (25+ years) of increasing its dividend payout and the financial strength (as measured by payout ratio) to easily afford to continue increasing dividends into the future.  The list above may seem boring, but each company is solidly profitable, has a very manageable amount of debt and a reasonable valuation.  Boring and low risk is not nessarily a bad thing, especially when you compare the stock prices of these companies against the S&P 500:

The big takeaway from this chart is that these companies have a lot more to offer than just a growing dividend; in fact, 3 of the 5 have more than doubled the performance of the S&P 500 over the past 10 years!  Beating the market by 65% (Family Dollar), 100% (Exxon Mobil) and 125% (Sigma-Aldrich) while providing a steady stream of dividends is hardly "boring"!  A portfolio with an equal investment in each of these 5 companies would have beaten the S&P 500 by 45% over the past 10 years while providing steadily growing dividends.
 
The Safest of the Safe
 
All 5 companies discussed above have solid business models, a strong history and the ability to significantly grow dividend payouts in the future.  However, most people probably don't want or need to add 5 stocks to their portfolio.  So, let's filter the list down further to the 2 companies that are currently yielding over 2.5% and take a look at how ExxonMobil and Aflac have increased their dividends over the past 10 years:
 
 
Translated into quarterly dividends, the chart above shows the growth in ExxonMobil's quarterly dividend from $0.23 per share in 2002 to $0.57 per share today.  Likewise, Aflac's quarterly dividend has exploded from $0.06 per share to $0.33 per share during the past 10 years.  There's no reason to believe that this dividend growth won't continue in the future, as discussed briefly below.
  • Exxon Mobil is the world's second largest company in terms of market capitalization, and this massive scale and worldwide presence provides it with a unique stability amongst major oil and natural gas producers.  While the company does experience short term volatility relating to oil prices, it has proven itself to be a long-term market beater.  When you factor in today's P/E of 9, the company's small 21% payout ratio and the current dividend yield of 2.6%, further growth in the dividend and share price appears on the horizon for the foreseeable future.
  • Aflac's niche insurance businesses in the United States and Japan continue to provide the company with a competitive advantage.  Market turmoil has punished many insurers recently, but the TTM P/E of 9 and forward P/E of 7 tell the story of a company that has successfully managed risk and plans to continue its growth trajectory.  Like ExxonMobil, Aflac's earnings power, dividend yield of 2.8% and payout ratio of just 24% support the thesis that Aflac's dividend will keep growing. 
There you have it.  Two companies that have increased dividend payments for over 25 years, yield over 2.5%, have payout ratios less than 25% and show no weakness in their respective long term business models.  Can you think of two safer dividends out there?

This article was originally published as The Safest Dividends in the Worldon Fool.com

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