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Snag These 3 Stocks for Some Safe Income

Sunday - 5/19/2013, 2:57pm  ET

In this market, with bond yields so low, dividend paying stocks are more popular than ever. And while everyone loves a check in the mail, not all dividends are created equal.

While a high dividend yield is nice, a safe dividend is better. Choosing stocks with low payout ratio's, the percentage of earnings that are paid out in dividends, is a great way to make sure your dividends are safe.

Here are three great companies with safe dividends, that you should consider buying now.

Dividends, naturally flavored

When you think of classic dividend stocks, Dr. Pepper Snapple Group is probably not the first name that comes to mind. Over the past five years this company has been known as a growth stock, as they've grown earnings in excess of 8% annually. So, some investors may be surprised to learn that Dr Pepper is a true dividend dynamo. Let's take a closer look.

This stock actually pays a hefty 3.11% dividend yield, that's growing. That's right, it may surprise you but DPS has raised their dividend four times since 2009 including once this year. How have they been able to do this?

Well, the first reason goes back to the payout ratio. Despite having a mammoth dividend, DPS pays out less than 60% of its earnings to investors. Even better, the company is still growing at a tremendous clip. Just this past quarter saw a 15% EPS beat; if the company keeps growing this fast, that payout ratio will get smaller. The dividend will be safer.

I'm betting that it does. Like Coca-Cola, DPS only focuses on beverages which gives it a leg up on competitor PepsiCo because it doesn't rely on its food business for profits. Logistical efficiency and less perishable inventory, are just two of the operational benefits from this business model that go straight to the bottom line.

When you factor in the fact that DPS has a tremendous mixed and packaged drink business, their edge in "perishable" inventory gets even better. In other words, the fact that this food company's products "can't spoil" will lead to even better earnings.

Industrial edge

It seems like General Electric has been stuck in the investors dog house, ever since Jeff Immelt cut the dividend in the peak of the great recession. But some great things have been happening at GE since then.

To name a few things:

  1. GE has actually raised its dividend five times
  2. GE has shed less profitable, non-core businesses
  3. GE, despite paying a yield over 3.3%, has kept its payout ratio below 60%

Really, all of those factors feed off of one another. To improve its fiscal position, GE made a concentrated effort to minimize the (risky) dependence on its finance arm. That dependence is, after all, what led to the dividend cuts. Now, with the recent sale of NBC, GE is focusing on its core businesses again (industrial, aviation, etc.) and winning large orders (such a huge recent order from Boeing).

This consolidation of business lines, coupled with prudent (albeit tough) financial decisions has made for a much stronger GE.  With a low pay-out ratio, and a less risky earnings stream--not to mention real growth potential--GE's dividend is as safe as it's been in years.

Think about dividends, differently

What is an investor to do with Apple these days? It seems the days of hypergrowth have passed, and now the big name hedge fund managers are even exiting the stock. But isn't there anything left to love about this tech giant?

Well there is, but like this companies slogan says, you have to "think different."

By that I mean it's time for investors to think of a Apple as a value stock with good growth prospects, it's not the top growth stock in the country anymore. Not being amongst the fastest growers is no sin, and I think Apple is well on its way to attracting a value crowd.

For starters

  1. Apple is now trading at a P/E ratio around 10, essentially the value of a utility company
  2. Most of the hedge fund managers and analysts that are going to turn sour on Apple, have done so by now
  3. Apple now pays a dividend of 2.8%, but only sports a payout ratio of just above 25%

That's right, the payout ratio is only a hair about a quarter of Apple's earnings. For all the talk about the iPhone maker putting its "cash hoard" to use, it should be noted that while they raised the dividend most of that cash went to stock buy-backs. So while their yield is higher, Apple has less shareholders to pay.

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