Dividend stocks could offer a higher yield and cushion the sudden rise in the VIX (volatility index) that markets have experienced. Be careful not to fall into what the industry calls a ‘dividend trap,’ meaning companies that inflate their dividend payouts to attract investors when they cannot afford to pay these yields.
Like a house of cards, this eventually falls on its head, as the inevitable unaffordability of these dividend payouts causes the company to take on debt or even issue more stock (dilute shareholders) to keep paying the artificial dividend payouts. This is why it’s important to check a company’s financials when hunting for dividend yields in a stock.
Mainly, you want to check for a track record of stability and bulletproof balance sheets. Not just one-year flukes that can be extended into a wrong assumption of continuation. Here are three companies that offer you that track record. Their business models and brands provide a reasonable expectation that these financials will continue.
Coca-Cola (KO)
Serving, on average, 1.7 billion servings per day across the world, Coca-Cola (NYSE:KO) is set to build on these bulletproof financials that can act as a green light to trust the underlying dividend.
Think about it: if the company can—as it has for many years—increase its prices to keep up with inflation, that represents roughly a $0.15 increase per serving, or $255 million in extra revenue per year.
Now, considering that Coke products are the few in this world that will not see a big dent in demand on rising prices, you know that Coca-Cola can increase prices a bit further than the inflation rate, something that shareholders can feel in their joyride of a holding period.
Paying you a 3.2% dividend yield today, you can trust that the company’s 25.0% average net income margin will act as a strong enough moat to keep the dividends coming in.
Over the past twelve months, the company has paid $7.9 billion in dividends while having $9.4 billion in cash balances and generating an additional $9.7 billion in free cash flow (operating cash flow minus capital expenditures).
If a recession hits the U.S. or even the global economy, it is not very likely that people will cut Coke products out of their budget since tastes span across different age groups and demographics, a brand penetration and resilience that is reflected in the company’s bulletproof financials.
Realty Income (O)
One of America’s favorite monthly dividend-paying REITs (real estate investment trusts), Realty Income (NYSE:O), has the track record to justify looking further into the portfolio’s bulletproof financials. Throughout its 55-year operating history, Realty Income has declared 644 consecutive monthly dividend payments.
Paying out a 5.8% dividend, an annualized monthly yield, this REIT pays $2.1 billion in dividend payouts while generating $2.9 billion in free cash flow. Now, how can you feel safe in the stability of these payouts? One word: Rents.
Keeping up with inflation and then some, Realty Income can comfortably increase its base rent year after year. In fact, as of their latest quarterly earnings results, they reported an increase in base rents of 2.1% and its dividend payout of 2.8%.
So this stock not only comfortably expands on its solid financials, but it routinely rewards shareholders as well. Analysts still see a 10.0% upside in their $67.0 share price targets from where the stock trades today. What’s more, REITs are required by law to pay 90.0% of their rental income to shareholders; what more bulletproof do you need?
Starbucks (SBUX)
Going back to the idea of moats and brand penetration, do you think a recession or a ‘tighter budget’ would make people skip out on their favorite coffee brand? Even if people choose to brew at home, they will likely buy the beans or ground coffee with the printed Starbucks (NASDAQ:SBUX) green medusa.
Paying out a 2.4% dividend today, you can rest assured in the company’s 12.0% average net income margin to be able to afford the dividend payouts, which pile up to $2.4 billion as of the past twelve months, which is taken out from the company’s significantly higher $4.4 billion in free cash flow during the same period.
Like Coca-Cola, Starbucks’ balance sheet shows a cash balance of $3.4 billion, which is above the required dividends for the year. Bulletproof enough for you to see how affordable these dividends are?
Because demand is only going up for their coffee, at the rate of 5.0% increases in revenue to beat inflation for the year, according to the company’s latest financial quarterly results.
As of this writing, Gabriel Osorio-Mazzilli did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
