3 Safest Dividends for 2020 – and My Go-To Dividend Safety Assessment Strategy
Marc Lichtenfeld, Chief Income Strategist
When it comes to income investing, in many ways, size doesn’t matter.
After all, many companies that pay out hefty 30% or 40% yields aren’t able to sustain those dividends long-term.
Then, investors who hopped on board chasing after the money get hit with a disappointing dividend cut or suspension.
But it’s also true that when you’re building passive income streams, it pays to be selective.
For instance, while you might invest in a stock because it’s poised for growth or a short-term gain, most of the time, a 1% yielder isn’t going to catch your eye…
What income investors want is a sizable, growing dividend.
And I’ve written the book on dividend investing – check out Get Rich With Dividends – so I always have my finger on the pulse of what’s happening in the markets…
Which companies are going to reward their shareholders…
And which will fall flat.
In this report, I’ve assembled three of the safest high-yielding dividend stocks around. I also pull back the curtain on the strategy I use to assess the dividend safety of hundreds of stocks every day for my readers.
With these tips – and with three of the market’s safest high-yielders in your portfolio – you’ll become a master at dividend safety.
My Go-To Dividend Safety Assessment Strategy
Before I get into why my top 3 high-yielding stocks of the moment deserve your attention, it’s important to mention why these have caught my eye.
The first thing that’s really important to me when assessing dividend safety is cash flow. A company should have sufficient cash flow to support its dividend.
Note, I didn’t say it should have sufficient earnings. There’s a big distinction between earnings and cash flow.
The metric “earnings” includes all kinds of non-cash items, whereas “cash flow” is really just representative of the cash that came into the company – and therefore is available to pay shareholders.
Here’s a very brief example…
Let’s say a company records a big sale on December 30. It sells $1 million worth of widgets. It can book that sale and include it as revenue, which trickles down to earnings, on its year-end results.
But the truth is, the company may not have even sent out an invoice yet, much less gotten paid. Meanwhile, its revenue and earnings have gone up even though it hasn’t taken in any more cash.
Next year when the company sends out that invoice, maybe the customer returns the item. Maybe the customer goes bankrupt, or maybe it just takes a long time to pay. That would drastically affect the cash flow available for the company that made the sale.
That’s why, as a dividend investor, I’m really only concerned with the cash that comes into the company. That’s the cash that’s going to pay my dividend – not earnings, which include non-cash items.
It’s also really important to me that a company have a long, reliable track record of dividend payments. I only want to invest in a company that hasn’t cut its dividend – and I’d prefer to invest in a company that has raised its dividend every single year.
Companies that raise their dividends every year for 10 years are termed Dividend Achievers, and companies that raise their dividends every year for 25 years or more earn the prestigious title Dividend Aristocrat.
A perfect example is Pepsico (Nasdaq: PEP).
At the beginning of May, Pepsi raised its dividend for the 48th year in a row. That sets the bar pretty high for investors, encouraging them to expect a dividend increase every single year.
After all, what do you think would happen if, after almost five decades of consistent dividend increases, Pepsi cut its dividend or suspended it altogether?
I think you’d see a disproportionate number of pitchforks and torches at its next shareholder meeting…
In short, a company’s track record, while not a guarantee, is a strong indicator of its dividend safety.
Combined with steady cash flow, a company’s track record gives me confidence in its payout – which is why my 3 top picks for 2020 bear looking into for any income investor…
3 Safest Dividends for 2020
The first safe high-yielding stock to make my list is a master limited partnership, or MLP. MLPs are typically pipeline companies for oil and gas – and this company fits the bill.
Enterprise Products Partners (NYSE: EPD) raised its dividend in March to $1.78 per share annually. That comes out to a whopping 10.7% yield!
And to my earlier point, Enterprise has raised its dividend every single year for 15 years in a row. This Dividend Achiever status gives me confidence in Enterprise’s commitment to shareholders.
What’s more, over the past 12 months, Enterprise Products Partners has only paid out 49% of its cash flow in dividends – so it’s generated twice as much cash as it has paid out.
That gives investors a nice buffer in case things get tough, as they are for many companies during this crisis. Pay attention to low payout ratios like this one – this metric is why I’m confident in Enterprise’s safety despite its sky-high double-digit yield.
My next top pick for the safest dividends for 2020 comes from an entirely different sector…
Preferred Apartment Communities (NYSE: APTS) is a real estate investment trust, or REIT. The company owns 101 apartment buildings and shopping centers, mostly in the Southeast.
Many of those shopping centers are anchored by Publix, a very strong and healthy supermarket chain. This gives me confidence that Preferred Apartment Communities’ tenants will keep their staying power throughout a difficult 2020.
Preferred Apartment Communities pays a 7.9% yield.
Now, when looking at Preferred Apartment Communities’ cash flow, it’s important to note that REITs use a different measure of cash flow called funds from operations, or FFO. Often, REITs will pay out all of their FFO – 100% – in dividends.
Preferred Apartment Communities does not do this. In 2019, the company generated $62 million in FFO while only paying out $44 million in dividends – a 71% payout ratio against a 100% norm.
This shows that the company generates plenty of cash to continue paying its dividend. It has also raised its payout every year since 2012 without a single cut, so while it’s not yet a Dividend Achiever, it’s certainly on the right track.
Typically, the highest-yielding stocks on the market will be MLPs and REITs like the two we just talked about. This is just a function of those companies’ structure.
But my list of the safest dividends for 2020 wouldn’t be complete without this third winner, which is neither…
The safest, highest-yielding non-REIT and non-MLP I’ve found after scouring the market hails from the financial sector…
People’s United Financial (Nasdaq: PBCT) recently raised its dividend for the 27th straight year.
It also has an impressive payout ratio, paying shareholders $280 million in dividends on a hefty $1.47 billion in net interest income.
(Net interest income is the metric that banks use to measure their cash flow.)
Yet despite this healthy payout ratio, People’s United offers a mouthwatering 6.19% yield.
And as a Dividend Aristocrat, the company has proven its management’s commitment to maintaining and growing that generous dividend.
Don’t Get Caught by Surprise in 2020
Now you see why the size of a dividend matters…
Successful income investors will look to the companies with the most generous and sustainable payouts.
And as I explained above, they can judge their holdings’ dividend safety by taking a look at the companies’ cash flow metrics and track records.
Each week in my free newsletter Wealthy Retirement, I analyze the dividend safety of a company based on readers’ requests.
And now that you’ve seen a few of the tricks up my sleeve, you’ll be able to ensure that your favorite dividends also stay secure.
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Hoping these Dividend Stocks help you, and looking forward to hearing from you soon,