Income Investing: 6 Safe Dividend Stocks for Volatile Times

Dow Jones
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In this jittery market, investors can use a haven -- and a good night's sleep. A consistent flow of dividend payments is better than a white-noise machine, but which stocks offer acceptable yield and appropriate safety?

Barron's has a list of six for investors to consider.

The battle for the safest dividend in the U.S. market boils down to Apple versus Nvidia. Apple stock dropped 2% after the company reported fiscal fourth-quarter earnings on Monday. Numbers were better than expected, but investors fretted over the high cost of memory chips and its impact on profit margins.

Apple guided to gross profit margins of about 45% for the December quarter, about one percentage point below analysts' projections.

Falling margins can be a red flag for a dividend payer, but it's hard to imagine Apple running into trouble. It pays about $4 billion in dividends per quarter, less than the company spends on new plants and equipment. Quarterly free cash flow typically ranges from $25 billion to $35 billion. We feel comfortable calling Apple's dividend secure.

Nvidia's stock has been battered recently by fears over artificial-intelligence financing and a newly Democratic Congress slamming the brakes on AI spending. (Don't forget that Nvidia chips can account for 40% or 50% of the cost of a data center.) But the graphics-processing-unit giant spends about $6 billion per quarter on dividends, less than it spends on new plants and equipment. Free cash flow is expected to top $54 billion in the fiscal third quarter, when Nvidia is expected to report revenue of $109 billion, up 90% year over year, on Nov. 17.

So, Nvidia's payout looks secure, too. The problem is that neither stock yields much. Nvidia yields 0.5%; Apple, 0.3%. That isn't great. The average yield of a dividend payer in the Russell 1000 is about 2.3%. It would be best to have high yield, safety, and, as a bonus, little correlation to the AI trade currently vexing the market.

Several stocks from the Russell 1000 fit the bill. Barron's identified six with above-average dividend yields that are easily covered from expected free cash flow over the next 12 months, including, in no particular order: Animal-health company Zoetis, bottled-water provider (including Poland Springs) Primo Brands, government contractor Booz Allen Hamilton Holding, beverage company Keurig Dr Pepper, auto parts maker Lear, and retailer Gap.

Those six yield an average of almost 3% and are expected to use roughly 30% of projected free cash flow on dividend payments, with none using more than 40%, giving them a nice cash cushion. All six have also recently bought stock back, offering some extra capital return for shareholders.

What's more, all six show very little correlation with the Magnificent Seven. So, investors can still rest easy when AI-related stocks are fluctuating wildly on the latest hopes and fears.

What the six don't all have is high valuations. The group trades at an average of about 12 times earnings expected over the coming 12 months. The S&P 500 trades at about 19 times.

Low price/earnings ratios can, of course, signal slower growth or some other competitive problem. The group is up a meager 5% year to date, while two, Zoetis and Gap, are down. All six, however, are expected to have stable operating profits for the coming few years, according to Wall Street projections.

While no stock screens are perfect, they do offer new ways to find ideas. This group of six offers a non-AI-centric way to earn some income, which feels like a good idea right now.

 

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