How to Find “Safe” Dividend Paying Stocks

Over the past two years I’ve been investing in dividend paying stocks. Given the low rates on savings accounts, I turned to “riskier” dividend stocks to get a better return on my money. Today I want to share a bit about my results and a resource I found to help identify dividend paying stocks that are considered safer.

My Investment Returns

I wrote about this approach a year ago in an article evaluating whether dividend investing is a smart alternative to a savings account. The idea isn’t to forego a savings account completely. We have our emergency fund in an online bank (ING Direct) that pays one of the best available rates. But the rates are still really low, and that prompted me to turn to dividend stocks.

Over the past two years I’ve invested in several stocks that pay dividends: Cisco (CSCO), Verizon (VZ), and Pepsi (PEP). I’ve also invested in Apple (AAPL), which will begin paying dividends soon. And just recently, I added shares of McDonald’s (MCD) and Ford (F). I’ve also invested in dividend-paying ETFs, one focusing on home construction stocks (ITB) and one on utilities (VPU). So far I’ve been very happy with the results:

Apple: Up 88.2%
Cisco: Up 11.7%
Pepsi: Up 14.9%
Verizon: Up 23.6%
ITB: Up 30.1%
VPU: Up 4.4%
Ford: Up 4.0% (purchased this month)
McDonald’s: Down 1.5% (purchased this month)

And the above performance numbers are a bit understated, because they don’t include reinvested dividends.

The dividend yields (dividend per share / share price) on these stocks range from a low of about 2% to a high over 5%. That’s a nice return as compared to a 1% savings account. Yes, there are additional risks with these stocks, but as a long-term investors, I think there is actually more risk in a savings account (more about that in a separate article).

How to Find “Safe” Dividend Stocks

So let’s talk about risk. The fact that a company pays a rich dividend doesn’t make it a good investment. Recall that the dividend yield is calculated by divided the divided per share by the share price. That means that if a stock’s price tumbles, the dividend yield goes up. If the company has hit hard times, however, it may eventually reduce or even eliminate its dividend.

And that brings me to a tool that may help you find safer dividend stocks. Citi equity strategists put out a research report each Monday. In a recent report, it listed 25 stocks with dividends great than 2.3% that it views as safer investments. So how did Citi calculate safety? Good question.

It looked at the cost of credit-default swaps for each company. Think of a CDS as insurance against the risk that a company will default on its loans. The cheaper the insurance, the stronger the financial health of the company. So Citi found high paying dividend stocks with low CDS costs. While there are of course no guarantees when investing in the market, this research is a good start if you are investing for dividends.

Here are some of the companies on Citi’s list (with dividend yields):

  • Altria Group Inc. (MO) (dividend yield 4.6%)
  • American Electric Power (AEP) (4.5%)
  • AT&T Inc. (T) (4.6%)
  • ConocoPhillips (COP) (4.8%)
  • Duke Energy Corp. (DUK) (4.5%)
  • Eli Lilly (LLY) (4.5%)
  • Lockheed Martin Corp. (LMT) (4.5%)
  • Southern Co. (SO) (4.1%)
  • Verizon Communications Inc. (VZ) (4.4%)

(Source: Barron’s)

Of the above stocks, Verizon is the only one I currently hold. As with all investment articles on Dough Roller, I’m not recommending any of these stocks. But I think the approach Citi has taken to identify safer dividend paying stocks is worth evaluating.

Published or Updated: August 20, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. jim says:

    I found a report that appears to be the list of stocks Citi picked with low CDS and dividiend >2.3%. But the list of 25 companies in figure 11 doesn’t match those listed in the Barrons article.

    http://www.fa.smithbarney.com/public/projectfiles/c9df9ac1-25dc-446d-a348-3d7f4791a65d.pdf

    THe list I found has several companies that are clearly in such a list Exxon, 3M, Mcdonalds, Kraft, Intel, etc. THey all have CDS spread under 50. THe list from Barrons has mixed CDS in the range 38-81 but all have yields >4%. I think the list from Barrons was a filter of CDS under 100 and yield >4%.

    • Rob Berger says:

      Jim, thanks for including the link.

  2. Evan says:

    “Yes, there are additional risks with these stocks, but as a long-term investors, I think there is actually more risk in a savings account (more about that in a separate article)”
    - More risk? I wonder if those who bought F in 2006 and 2007 or even 2008 would agree.

  3. Using Citi’s research report is a good approach, but better yet is to focus on an income-focused stock selection strategy that involves buying stocks with a long history of increasing dividend payments (known as Dividend Aristocrats or Dividend Champions) and reinvesting any proceeds. One of the best sources of these dividend paying companies is “Get Rich with Dividends: A Proven System for Earning Double-Digit Returns” by Marc Lichtenfeld.

  4. Have you looked at any dividend-focused mutual funds? Investing in one would save you the time needed to look at individual stocks and provide more diversification.

    • Rob Berger says:

      That is a great approach, too. I’ve avoided it because I don’t want to pay the fees associated with a mutual fund. But it’s still a good choice and there are many low cost options.

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