Stocks that ‘Pay’ Offer More Safety for Investors

Read the companion article from TheStreet.com: 3 Dividend Stocks With Rising Payout Potential.

TOM HUDSON: The U.S. government may have had its credit rating dinged, but investors continue piling into bonds, driving down bond yields. Now in the meantime, almost 40 percent of the companies in the S&P 500 offer to pay higher rates than Uncle Sam to shareholders. That brings us to tonight’s “Word on the Street,” “dividends.” David Peltier is a portfolio manager at thestreet.com. He joins us once again.

So, David, how much protection do dividends provide during the kind of volatility we’ve seen over the past month or so?

DAVID PELTIER, PORTFOLIO MANAGER, THESTREET.COM: Well, a fair amount, Tom. In the short term dividends can only help so much. Stocks are going to go down 10 percent, some of these stocks will also go down, albeit by a lower amount, but over the long run, that’s when dividends really pay off. Over the last several decades, dividends account for almost half of the gains in the S&P 500.

HUDSON: It’s important, the long run there. You’re talking 10 years, 15 years, 20 years to hold on to see these kind of returns, right?

PELTIER: Yes, in fact, with the S&P, that’s over the last seven decades. But, yes, some of these stocks can be held for several decades.

HUDSON: All right. Let’s get to tonight’s dividend ideas here, beginning with EAT, E-A-T. This is Brinker International (NYSE: EAT), better known as Chili’s, of course. It runs the Chili’s chain of restaurants. About $23 per share, yielding just under 3 percent. Why do you like it?

PELTIER: The key with dividends is I like dividends that are growing. And in Brinker’s case, they just recently raised the dividend last week. The stock is now yielding 2.8 percent. And this is dividend that can be covered with solid earnings growth.

HUDSON: This gets to a key point of when is a dividend safe and when is it not safe? So how do you judge a company’s ability to continue to pay if not grow its dividend?

PELTIER: Basically I look for two times earnings coverage. And in Brinker’s case, they earn almost three times as much as the dividend. I also like that the company is growing its earnings in the double-digits for the second straight year.

HUDSON: All right. Very positive. You also like Altria, otherwise known as Philip Morris, M-O the ticker symbol on this one, yielding over 6 percent at $27 per share. Where does the dividend go from here?

PELTIER: Well, the company actually just recently raised the dividend just earlier this week, so the yields, as you mentioned, over 6 percent. The company has now raised its dividend 45 times in the past 42 years. This is a serial raiser and really I think this is a stock that will give you consistent double-digit growth with a 6 percent baseline, it’s not hard for the stock to move you up into the double-digits.

HUDSON: And, of course, you have to be comfortable owning a cigarette-maker knowing where these profits are coming from.

Now one sector that has gotten hurt by dividends, which is, of course, the banking stocks over the past several years, and a sector that traditionally doesn’t pay dividends is technology. Microsoft (NASDAQ: MSFT) is your final choice in technology. This has been a big battle between a growth and a value stock for years, yielding about 2.5 percent. Why this one?

PELTIER: What I like about Microsoft (NASDAQ: MSFT) is that they haven’t raised the dividend yet. The stock already yields 2.5 percent, but I expect that they’ll raise the dividend some time in September. In the meantime, like you said, it’s a battle between value and growth, but I would like the buy Microsoft (NASDAQ: MSFT). It’s trading at just nine time earnings. I think it’s very inexpensive for a company that generates tons of free cash flow.

HUDSON: Making the value argument there. Can you own any of these? Do you, David?

PELTIER: I cannot and I do not own these stocks.

HUDSON: David’s article, you can find it at thestreet.com, also a link to it on our Web site. “Word on the Street” with David Peltier with thestreet.com.


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