Earning steady income from your investments has never been harder.
Today’s certificates of deposit (CDs) yielding next to nothing…
Same for US government bonds…
Income investors desperately need dividend-paying stocks.
But there’s a problem: Most dividend-paying stocks barely generate any income!
The S&P 500 dividend yield is currently a measly 1.9%:
That’s just below the yield on investment-grade bonds. While that yield will help you beat inflation, it won’t do much in terms of real income. To generate steady income and beat inflation, you need a yield of at least 4%.
That’s easier said than done. Because the higher the dividend yield, the more likely it is that dividend is NOT safe. And considering that 2020 is the worst year for dividend-paying stocks since the Global Financial Crisis, you have to be careful where you park your cash.
Let me show you a few ways to tell if a dividend yield is safe or not.
The Best Way to Tell If a Dividend Yield Is Safe
Whenever I consider a dividend-paying stock, the first thing I do is run the company through my Dividend Sustainability Index (DSI). This is a tool I developed to gauge the safety of a company’s dividend.
There are three key factors in my model: payout ratio, debt-to-equity ratio, and free cash flow.
The payout ratio is the percentage of net income a firm pays to its shareholders as dividends. If a company pays a dividend of $1.00 and generates annual earnings-per-share of $2.00, that means the company has a payout ratio of 50%.
As a rule of thumb, any payout ratio below 80% is safe.
Next we have the debt-to-equity ratio. The more debt a company has, the harder it gets to run a business. This includes—you guessed it—paying the dividend.
Last but not least, we have free cash flow. This is the amount of cash left over after a company pays its expenses and funds the dividend.
If any of these measures is flashing red, you know the dividend is in trouble.
These +4% Dividend Payers Pass the Dividend Sustainability Index
One of my favorites is Pfizer Inc. (PFE), one of the world’s leading pharmaceutical companies. In addition to working on a COVID-19 vaccine, the company is a leader in cardiovascular, neuroscience, and other life-saving therapies.
Pfizer is a great option for dividend investors. With a 4.2% dividend yield and a low payout ratio, low debt, and strong free cash flow, the company scored a perfect 100 on the DSI.
Next on my list is KeyCorp. (KEY). The Ohio-based regional bank serves middle-market clients in 16 states throughout the US.
KeyCorp sports a hefty 6.1% dividend yield. While I’d normally be wary of such a high yield, KeyCorp scored a 96 out of a possible 100 on the Dividend Sustainability Index.
Another favorite is Omnicom Group Inc. (OMC), the world’s second-largest ad holding company. 85% of OMC’s revenue comes from developed markets in North America and Europe.
And it pays a whopping 5.1% dividend yield. The company has a low payout ratio, steady free cash flow, and a manageable debt load. That grants the company an excellent DSI score of 90 out of 100.
In my premium investing service Yield Shark, I constantly monitor the portfolio’s dividend sustainability. That’s why I’ve never had a company cut its dividend.
If you are looking for income, you should read about my latest top recommendation: a company with a safe, 11% dividend yield. And—like all my recommendations in Yield Shark—it has a solid DSI score of 92 out of 100.
Give my Yield Shark research service a try for 30 days and join thousands of happy income investors. Click here for all the details.