8 dividend stocks that split the difference between yield and safety

  • By Lawrence C. Strauss,
  • Barron's
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In the quest for safe dividends during a time in which payouts are coming under pressure, it might be wise to follow the pros.

Income investors have endured plenty of turmoil in recent weeks as companies across many sectors seek to stay afloat during the coronavirus pandemic. About 50 companies in the S&P 500 index (.SPX) have cut or suspended their dividends so far in 2020.

To begin narrowing down the field of contenders, this week’s column relied on two established exchange-traded funds that look for companies with reliable dividend growth—the Vanguard Dividend Appreciation (VIG) and the WisdomTree US Quality Dividend Growth (DGRW). The Vanguard fund was recently down 14.5% since the market peaked on Feb. 19, slightly ahead of the S&P 500’s 15.2% loss. The WisdomTree fund was down about 14%.

Barron’s wrote recently about how such funds have held up relatively well in recent months, but this column attempts to focus more on some of the individual stocks they hold.

The $40.3 billion Vanguard fund replicates the Nasdaq U.S. Dividend Achievers Select Index. Its constituents have increased their regular annual dividends for at least 10 straight years. The $3 billion WisdomTree fund has about 280 holdings drawn from the company’s much larger U.S. dividend index.

Barron’s selected eight stocks from among the top holdings of the two funds, eschewing any securities with dividend yields below 2%—their solid payout growth notwithstanding.

That precluded high-profile stocks such as Apple (AAPL), which yields 1.1%; Microsoft (MSFT), 1.1%; and Costco Wholesale (COST), 0.9%, among others.

Nothing against those companies, which boast plenty of free cash flow, seemingly healthy dividends, and growing payouts. Apple, for example, on April 30 declared a quarterly dividend of 82 cents a share, up a little more than 6% from 77 cents.

But we passed on Apple and others this time because of their puny yields.

There were plenty of other stocks with 2%-plus yields among the top holdings of these funds, however.

The WisdomTree fund’s largest holding is wireless company Verizon Communications (VZ), which was recently yielding 4.4%. The stock has held up pretty well since the S&P 500 peaked on Feb. 19, down about 5%.

One potential worry for income investors: Verizon has a lot of debt.

As of March 31, its long-term debt totaled $106.6 billion against equity of $61.7 billion. The company, however, says it remains committed to its dividend—something it should be able to deliver upon, thanks to its strong free cash flow. That free cash flow totaled $3.6 billion in the first quarter, up 26% year over year.

In early March, Verizon’s board declared a quarterly dividend of 61.5 cents a share, in line with previous payouts.

On Monday, speaking during an investing conference, Verizon Chief Financial Officer Matthew Ellis said, “Our capital allocation model hasn’t changed as a result of Covid.” The top priority, he said, is “to invest in the business,” followed by the dividend.

“We know how important that is to our investors,” he added.

Meanwhile, two of the Vanguard fund’s top holdings recently included Procter & Gamble (PG) and Johnson & Johnson (JNJ), both of which declared dividend increases last month—a sign that their businesses remain durable during the pandemic.

Another holding, fast-food operator McDonald’s (MCD), remains committed to its dividend, as well. During the company’s first-quarter earnings call on April 30, CFO Kevin Ozan said that “our capital allocation priorities remain investing in the business for growth and prioritizing dividends to our shareholders.”

Another recent top holding for the Vanguard fund was Comcast (CMCSA). Its sprawling assets include cable communications such as high-speed internet access, theme parks, broadcast outlets NBC and Telemundo, Hollywood studio Universal Pictures, cable networks, and Sky broadcasting in Europe.

CFO Michael Cavanagh said in part during the company’s first-quarter earnings call on April 30 that Comcast remains set on “returning capital to shareholders through a strong commitment to our recurring dividend.”

The fund also holds medical-device company Medtronic (MDT), which appears to be well positioned to get through the pandemic. The company said in an April 21 press release that its capital-allocation priorities include “paying a strong dividend.”

The company has been paying a quarterly dividend of 54 cents a share since last July.

The WisdomTree fund’s top holdings include pharmaceutical firm Merck (MRK) and PepsiCo (PEP).

PepsiCo, the beverage and snacks company, on May 5 declared a quarterly dividend of $1.0225 a share. That’s a 7% boost from 95.5 cents a share.

PepsiCo CEO Ramon Luis Laguarta said during a May 6 call with analysts that the company’s cash flow remains strong. “We continue to expect total cash return to shareholders of approximately $7.5 billion in 2020, comprised of dividends of $5.5 billion and share repurchases of $2 billion,” he said.

Merck CEO Kenneth Frazier said in part during the company’s first-quarter earnings call on April 28 that the company’s financial strength and balance sheet “allow us to continue with our capital-allocation priorities.” Those include “paying our dividends,” he said.

Nothing is guaranteed, as the coronavirus pandemic has shown. The dividends of these eight companies, however, do look pretty well protected right now.

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