By Michael Brush, MarketWatch
MarketWatch photo illustration/Bloomberg
With the sharp declines in the stock market, we now see attractive dividend yields all around.
But while dividend yields rise as stock prices fall, be careful trolling for rich dividend plays. Many of them will blow up in your face.
That’s because cash flows are drying up because of the coronavirus pandemic, which puts financial stress on companies. Many will be cutting dividends to compensate. If you are shopping for dividends, you don’t want one of these turkeys.
To sort the good from the bad, I consulted a half-dozen dividend experts to point us to the safe dividend plays.
Here are 26 companies with safe dividends, and also some lessons from these experts on how to make this call if you want to look on your own.
Go for ‘asset-light’ businesses
Companies that don’t have to put a lot of money into factories and equipment typically have lots of cash flow. This is a good place to look for dividend durability.
Two companies that have safe dividends here are the money management company BlackRock /zigman2/quotes/207946232/composite BLK -0.06% with a 3.3% yield, and the market exchange operator CME /zigman2/quotes/210449693/composite CME -0.85% (1.8%), says Matthew Page of the Guinness Atkinson Dividend Builder fund .
He’s worth listening to because his fund beats its MSCI ACWI index and Morningstar world large stock category by an annualized 2.3 and 2.8 percentage points, respectively, over the past three years, says Morningstar.
One quality he likes to see when weighing dividend safety is a high interest coverage ratio, or EBITDA divided by interest costs. This should be around eight or more. He also likes to see relatively low dividend payouts relative to earnings. Dividend payouts should be around 50% or less. BlackRock has virtually no debt, so interest coverage isn’t an issue, and it has an acceptable dividend payout ratio of 54%. CME has an interest coverage ratio of 15 and a payout ratio of 40%.
Consider banks and insurers
These financial-sector plays have been hammered for obvious reasons. Banks have to deal with bad loans, and insurers have a tough time getting return on investment because interest rates are low. To find the safer names in this space, Kelley Wright, of Investment Quality Trends, looks for low dividend payout ratios of around 50% or less, reasonable long-term debt to equity ratios of around 50% or less, and a long history of dividend hikes of 10 years or more, among other qualities.
Banks that look safe by his metrics include Bank of Montreal /zigman2/quotes/206428109/composite BMO -1.91% /zigman2/quotes/203180563/delayed CA:BMO -1.14% , which pays a 6.5% dividend yield, Bank of Nova Scotia /zigman2/quotes/207954556/composite BNS -2.07% (6.7%), Lincoln /zigman2/quotes/205272400/composite LNC -7.10% 5.5%), and Unum /zigman2/quotes/208720096/composite UNM -7.10% (7.6%).
Shop in the worst-hit sector
The Energy Select Sector SPDR /zigman2/quotes/206420077/composite XLE -3.40% , Vanguard Energy /zigman2/quotes/202541791/composite VDE -3.76% and SPDR S&P Oil & Gas Exploration & Production /zigman2/quotes/203527521/composite XOP -4.55% exchange-traded funds are down 47% to 55% so far this year through Thursday, compared to 14% and 17% for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.04% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.62% .