Everyone wants yield these days.
But just as important as generating a healthy amount of income is ensuring that an income stream doesn't turn into a trickle. That's why every Wednesday I'm going to look at a stock to determine the safety of its dividend, and the likelihood it'll continue to get paid or even raised.
It's a new feature I call The Safety Net.
If you'd like to have your stock reviewed in a future column, simply leave the name of the stock in the comments section below. Of course, we always want to hear your opinions, questions, "yo mamma" jokes, grocery lists and anything else you want to write. So don't stop at just a ticker symbol when you leave your comments.
On to our first stock:
Intel (Nasdaq: INTC) has gone from one of the leading and most dynamic growth companies to, incredibly, a Dog of the Dow - the class that represents the 10 highest-yielding stocks in the Dow Jones Industrial Average.
The chipmaker currently yields 4.2%.
It's been a terrific dividend growth story. Intel has raised its dividend nine consecutive years. Over the past five years, the company boosted the dividend by an average annual rate of 14.1%.
Even in the past year, which saw the company's revenue decline by 1.2% and net income slip by 15%, Intel still managed to lift its dividend by 11.2%.
And 2013 will be trying as well.
While the company did not give earnings guidance for the year, Wall Street projects earnings per share of $1.93, down from $2.13 in 2012.
There are various contrarian reasons to like Intel here. First is the stock's price-to-earnings ratio of 11. There's also the fact that sentiment is so poor and the company has many opportunities to surprise to the upside (including a rebound in PC sales). And don't forget about greater traction in sales of mobile devices.
But for the long-term dividend investor, who is most interested in making sure they get paid their 4.2% next year, let's take a look at the likelihood that Intel will continue to pay (and perhaps even increase) its dividend.
The Safety Net
In 2012, Intel paid out $4.4 billion in dividends versus $11.6 billion in net income. The payout ratio, which is dividends paid divided by net income, was 38%.
In other words, the company paid out 38% of its profits in the form of dividends.
That 38% figure is a low number. And the lower the number, the safer the dividend. It implies that even if earnings fall, the company will still make enough money to pay, and possibly raise, the dividend.
As I've said before, I like to see a payout ratio of 75% or lower. It gives us a strong safety net to rely on.
If the figure is above 75%, I worry that, if the company has an off year, it may not be able to pay and raise the dividend without dipping into cash reserves.
Or worse, the company may even cut the dividend.
Clearly Intel passes the 75% test.
Most analysts would stop there and declare the dividend safe. But I take it a step further and dig deeper into the financial statements.
The key for me is cash flow - which shows us how much cash a company brings in to its business and how much goes out. Earnings are great, but the final figure has all kinds of non-cash items like depreciation included in it.
Here's a very simple example of what I'm talking about.
Let's say you own a pizzeria. At the end of the year, you show a gross profit of $100,000. However, two years ago you spent $50,000 on new ovens. You're allowed to write off $10,000 per year in depreciation as an expense.
Your income statement would look like this...
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