We’re moving into a dangerous time for the markets. Historically, September has been the worst month for stocks by average return and October has posted the two largest drops from 1950 to 2012. This year we’ve got the upcoming debt ceiling debate and the tapering of bond purchases by the Fed.

While the market is down less than 5% from its high, it may be time to get defensive and look for the safest dividends in the market. Of course, the list below are not the only stocks that could provide safety in cash returns but they are the top five in their respective sectors.

Looking for the stocks below, I looked for companies with a high percentage of cash and current assets relative to their near-term liabilities (current ratio). This way, if things get bad, they will still be able to fund the dividend. I also looked for operating margins above the sector average. This may not be as directly related to dividend safety, but I like to make sure management is able to operate the company effectively. Of course, a strong history of dividend increases is important to make sure management is fully committed to returning cash to shareholders.

As always, I like to pull targets from different sectors to make sure my portfolio is diversified. Screening for specific fundamentals irrespective of sector or industry will inevitably put you all-in on one specific group and set your portfolio up for a crash when the group falls out of favor.

Consumer Staples

Lorillard (LO) is a $15.7 billion tobacco company that has recently diversified into the E-cigarrette market and pays a 5.2% yield. The company has a current ratio of 2.4 times and an extremely strong 47% operating margin. The dividend has increased every year by an annualized 14% since 2008.

Technology

Microsoft (MSFT) may not be the spectacular profit machine it once was but is now a cash cow that is in enough products to be one of the most diversified tech companies in the market. The shares have been rangebound over the last few years but pay a 2.9% dividend and the price should be relatively stable through market turbulence. The company has a current ratio of 2.7 times and a 34% operating margin. The dividend has increased every year by an annualized 14% since 2005 with no cuts.

Healthcare

Johnson & Johnson (JNJ) has had some problems with recalls and quality control in the past but looks to be largely behind them. The company is well-diversified in two of the most stable sectors in the market with revenue from healthcare and consumer staples. The dividend has been consistently increased every year for the last 30 by an annualized 13% and returns a 3% yield. The company has a current ratio of 2.2 times and a 27% operating margin, which is high for a mature sector.

Energy

Chevron (CVX) is the best of breed for integrated oil & gas companies with a 3.3% yield and strong profitability. The company is probably the best positioned to take advantage of the shale boom, not only in the United States but across the globe. The dividend has increased by an annualized 6% for more than 30 years and has never been cut. The company has a current ratio of 1.7 times and a 14% operating margin.

Utilities

Utilities are the ultimate safety play for dividends but investors need to resist the urge to put too much portfolio weight into the sector. PG&E Corporation (PCG) is a $19 billion energy provider in California and would make my short-list for best of breed in the sector. The shares pay a 4.3% yield and the dividend has increased by 3% annually over the last 15 years, fairly high for a regulated utility company. The company carries a current ratio of 0.7 and an 11% operating margin, low compared to the other picks but high when compared to peers in the sector.

 

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5 Responses to The 5 Safest Dividends in the Market

  1. marylou cass says:

    What about its debt/equity and negative net worth? I see the new LT debt and the stock repurchases but seems they are making some huge bets here. There has also been more insider sales at 42-43 though not a large amount…. Regulation and litigation on e-cigs is one huge Pandora’s box. Thoughts? ML Cass

  2. Integrator says:

    I’ve got a holding in Lorillard as well, though my only concern here is with some of the talk about a methanol ban thats been going on. Hopefully talk is all that it is.

  3. Wilma Seeman says:

    What makes these five stocks safe if everything goes down by 50% like some leaders are saying they will?

  4. Michael says:

    Wilma, agreed. If you’re sitting in an airplane that is expected to crash very soon it makes more sense to put on your parashute than looking for the safest seat in the plane.

  5. San Fran Sam says:

    Not sure where you are getting your information from regarding PG&E. it went through a bankruptcy in 2001 and emerging in 2004. dividend was eliminated those years.

    it could be getting a 3% per year increase to get back in line with the pre-bankruptcy dividend.

    also with the San Bruno penalties hanging over its head….

    from the chart looks like a buy at $40 and a sell at $44-$45

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