When you’re deciding what stocks to invest in, you have a number of options available to add to your portfolio. One option is dividend stocks, which can help you receive money back on a regular basis. Before investing in dividend stocks, it’s helpful to know which ones are the safest options and which ones may require you to take on more risk. Review some of the safest dividend stocks to invest in when developing your own personal investing strategy and get an understanding of what these types of stocks are.
- Dividend stocks are investments in a company that provide a portion of its profits to its shareholders.
- Dividends are paid regularly and can come in the form of cash, additional shares of stock, or other property.
- Investors can use payout ratios to determine how sustainable a dividend stock company is in the long run.
- Reviewing some of the safest dividend stock companies can help investors choose options that are more likely to provide consistent payouts.
What Are Dividend Stocks?
Dividend stocks are provided by companies that pay the shareholders dividends, or a portion of the company’s earnings, regularly. The payments come from profits generated by the business that don’t need to be reinvested in the company. Dividends can be paid in several forms including additional stock shares, cash, or property. Dividend stocks are an investment category that many investors choose to add to their portfolios because of their ability to provide regular income.
In order to provide dividend stocks, a company must be financially strong and consistently generate more profit than is needed to operate. Additionally, dividend stock companies must establish a policy that allows for the payment of dividends to shareholders, which has to be approved by the board of directors. Dividend stock companies are found in all industries, although they must show continued growth and success to be considered safe for investing.
Using Payout Ratios to Determine Sustainability
If you’re thinking about investing in dividend stocks, it’s helpful to understand what makes a company safe versus risky to invest in before you take the plunge. Many investors choose to measure the sustainability of a dividend company, which can be done with the dividend payout ratio and the cash dividend payout ratio. The payout ratio is the portion of the company’s cashflow needed to pay the dividend. For example, if a company earns $5 per stock share and offers a $2.50 dividend, the payout ratio would be 50%.
When the payout ratio is lower, this shows that the company is retaining more of its profits. As a result, the dividend is generally at a lower risk of being cut if the company’s profits drop unexpectedly. A very high payout ratio can indicate a higher risk, although, it can pay off if the company is achieving great success. When reviewing safe dividend stocks to invest in, you can usually view them in groups based on the dividend yield, which is the size of the dividend that is commonly paid to shareholders.
Visa is the largest payment processor in the world, with over 323 million people holding its cards. This impressive company is among the best safe dividend stocks to buy. The company’s stability is based on a growth and income-focused strategy, which has helped it expand its revenues by more than 60% in the past five years and increase its profits by 83% in the same time period. Currently, the dividend payout is $0.25 per share, marking a 150% increase over its $0.10 payout in 2015.
Visa also pays out less than 20% of its total profits as dividends, which is a low-level that provides room for aggressive growth over time. Its cash flow is more than five times its dividends, with earnings that continue to increase, making Visa one of the safest stocks to buy when you are looking for dividend options.
Another of the safe dividend stocks to buy is Steel Dynamics, a major production company that delivers carbon steel products. Its list includes merchant bar, structural, rail, and other steel products, although more than 60% of its product mix is made up of flat-rolled steel. The company is the third largest carbon steel product producer in the nation.
Although the steel industry has struggled somewhat over the last few years, Steel Dynamics yields over 3% to its stockholders. This number is one of the highest payouts of any safe dividend stock companies, yet it only uses 15% of its profits to pay out dividends. The company also has nearly seven times the amount of levered free cash flow needed to maintain the payout level.
Home Depot has provided impressive total returns in the past, making it one of the top safe high dividend stocks. The company has been in the news as of late, due to a political contribution by the co-founder that made some on the other side of the spectrum upset, but overall, this hasn’t impacted profits or its stability. Home Depot has consistently increased its dividend payout, marking an increase of nearly 190% over the dividend paid in 2014.
The dividend payout is 45%, so it’s not the lowest company on the list, but it still provides plenty of room for growth. Additionally, the company has more than 2.7 times its regular payments in levered free cash flow. Experts predict that the dividend payout should continue to increase based on Home Depot’s proven success.
Booz Allen Hamilton
Booz Allen Hamilton, an engineering, IT consulting, and analysis firm that operates on a global scale, is also one of the safe high yield dividend stocks. The company has a strong focus on defense and government customers, which makes it quite stable. In 2019, Booz Allen Hamilton’s shares increased by more than 50%. Toward the end of May, the company announced its quarterly earnings, marking a 23% increase over the previous quarter.
Analysts predict good things for the firm as well, with an estimated 7% to 8% growth rate in 2020 that should lead to profit increases in the double-digits in the same year. The fundamentals of the company have led to a major dividend increase in the last five years, although, only 27% of the profits are needed to fund the dividends, making it a safe choice.
When you’re looking for the best safe stocks to buy now, consider Chemed. This business is interesting in that it includes two somewhat disconnected subsidiaries, which are Roto-Rooter and Vitas Healthcare. Roto-Rooter is a well-known residential and commercial plumbing and water cleanup company, while Vitas Healthcare offers hospice care in 14 states in the U.S. Since 2014, the company has gone from $99.3 million to $205.5 million in profits and increased its revenue by $300 million. Profit expansion is expected to continue, which should lead to single-digit revenue expansion as well.
Zoetis is generally considered to be one of the safe dividend stocks for investors at all levels. This company is the world’s largest manufacturer of medications for livestock and pets. Before breaking off in 2013, Zoetis operated as a subsidiary of Pfizer. The products include sedation drugs, vaccines, medicinal additives to feed, and parasiticides, and are available in over 100 countries. Pet and livestock owners are willing to invest in their animals, a fact that has driven strong growth in the animal health care market. Experts predict a value of $70 billion by the year 2026.
Since it spun off from Pfizer, Zoetis has provided payouts that have increased by 152%. The first dividend in 2019 marked a 30% increase yet only 20% of the company’s profits are needed for the distribution. Additionally, the company has a levered free cash flow value of more than 11 times the dividend cost.
Brady, an identification company, is another of the safe high dividend stocks. Many investors haven’t heard of it, but nearly everyone who works in an office or has visited a retail store has likely encountered one of the company’s products. Brady makes all kinds of products that allow businesses to identify and label items, including printers, software, and signage. Even the “slippery when wet” signs used to protect people visiting a business can often be attributed to Brady.
Although the growth has been slow, the stability of the company is what makes it a safe option, and Brady has been able to beat out its performance over most of the major time periods. In the last five years, the dividend payout has increased by just under 10%, but what’s really impressive is the fact that it announced its thirty third consecutive increase in 2018.
Whether you choose to purchase stocks from one of these safe companies to invest in or you find your own appealing dividend stocks, adding dividends to your portfolio can help you generate income to continue investing. If you have questions about your strategy or how to increase the value of your investments, the experts at Raging Bull can help. Schedule a free one-on-one session or download our free e-book to learn new ways to trade stocks.