Three dividend stocks rated ‘A’ for safety

3 years ago 296

In a satellite of debased involvement rates, dividend stocks tin beryllium a blessing for investors who request income. But it tin beryllium a nightmare if a institution cuts the dividend payout.

For example, connected May 18, shares of AT&T Inc. T, +0.24% fell 6% aft the institution announced a alteration of strategy — a program to reverse years of costly acquisitions by spining disconnected WarnerMedia successful a woody with Discovery Inc. DISCA, -0.16%. Investors weren’t blessed with AT&T’s program to “resize” its dividend, with the output connected the shares expected to diminution to astir 4% from 7% earlier the woody was announced.

The spin-off hasn’t been completed yet, and the dividend hasn’t been cut, but AT&T’s shares person fallen 13% (excluding dividends) since May 17, portion the S&P 500 Index SPX, -0.18% has risen 7%.

Marc Lichtenfeld, the main income strategist for the Oxford Club, an investment-research steadfast headquartered successful Baltimore, rates stocks for dividend safety, taking antithetic approaches for antithetic types of companies. Three examples of higher-yielding companies with “A” ratings for dividend information are below.

Dividend information ratings

Lichtenfeld writes the Safety Net column, and his team’s quantitative dividend information ratings are disposable to Oxford Income Letter subscribers. The exemplary rates each dividend stocks for which the required input information are available. During an interview, helium explained however his dividend information exemplary works.

Dividend payout ratios

For astir companies, Lichtenfeld likes to spot a dividend payout ratio of 75% oregon little — otherwise, the dividend information standing volition beryllium lowered. Dividends connected communal shares paid during a fiscal twelvemonth shouldn’t transcend 75% of a company’s escaped currency travel for the year. Free currency travel is simply a company’s remaining currency travel aft planned superior expenditures. It is wealth that tin beryllium utilized for dividends, stock buybacks, enlargement oregon for different firm purposes. A precise precocious payout ratio whitethorn beryllium an indicator that a dividend chopped is coming, unless it is simply a impermanent condition.

If the information are available, the dividend information exemplary volition incorporated payout ratios based connected statement estimates for the existent fiscal year, arsenic good arsenic humanities numbers.

For astir existent property concern trusts (REITs), which are required to administer astir income, the acceptable payout ratio is 100% of funds from operations (FFO), which is commonly utilized successful the REIT manufacture to gauge dividend-paying ability. FFO adds amortization and depreciation backmost to earnings, portion excluding gains connected the merchantability of investments.

For owe REITs, which originate loans and/or absorption connected investing successful mortgage-backed securities, Lichtenfeld volition usage nett involvement income arsenic a proxy for FFO.

For vigor maestro constricted partnerships (MLPs), payout ratios tin besides spell up to 100% without penalties to the dividend information rating. For MLPs, Lichtenfeld’s exemplary volition comparison dividend payouts (technically, distributions to concern portion holders) to reported distributable currency travel oregon concern income, “whatever the institution reports arsenic a proxy for escaped currency flow,” helium said.

For banks, the ratings exemplary looks backmost to cipher payout ratios based connected nett involvement income.

Other factors — growth, leverage and dividend cuts

Lichtenfeld’s dividend information ratings incorporated escaped currency travel growth, oregon the different factors mentioned supra for REITs, MLPs and banks, arsenic good arsenic the maturation of dividends. Companies that rise dividends for 10 consecutive years volition person a “bonus” added to the scoring for dividend information ratings. The gait of dividend maturation tin besides amended the ratings.

A institution that has chopped its dividend wrong the past 10 years volition person a punishment to its rating. For example, Kinder Morgan Inc. KMI, +0.70% is rated a “C,” adjacent though its payout had much than doubled successful 2020 from 2017, successful portion due to the fact that the pipeline relation chopped its dividend by 75% precocious successful 2015, but besides due to the fact that of a precocious level of debt.

Lichtenfeld explained that since the exemplary looks astatine afloat fiscal years, firm announcements tin origin adjustments to beryllium made to the information ratings betwixt yearly reporting cycles. AT&T hasn’t chopped its dividend yet, but since a program to trim the payout has been announced by the company, its dividend information standing is “F.”

Three companies with ‘A’ ratings

Lichtendeld discussed 3 “higher-yielding” companies rated “A” for dividend safety:

Omega Healthcare Investors Inc. OHI, -1.00% is simply a REIT with a dividend output of 8.51%. It invests successful health-care properties successful the U.S. and U.K. The company’s FFO per stock for 2020 was $3.20, portion dividends per stock for the twelvemonth totaled $2.68, according to information provided by FactSet. For 2021, the statement FFO estimation among analysts polled by FactSet is $3.30, portion the existent yearly dividend payout complaint remains $2.68, truthful the dividend appears to beryllium well-covered. The dividend hasn’t been accrued since November 2019, but the company’s yearly dividends paid person accrued 18 years successful a enactment done 2020.
Arbor Realty Trust Inc. ABR, -0.05% has accrued its dividend for 9 consecutive years. The stock’s existent output is 7.63% with an yearly dividend payout complaint of $1.40 a share. Arbor Realty is simply a owe REIT — it is simply a residential owe lender and indebtedness servicer. It sells immoderate of its recently originated loans to Fannie Mae FNMA, and Freddie Mac FMCC, -1.97%. Because of the quality of Arbor’s business, Lichtenfeld uses nett involvement income (the dispersed betwixt income from loans and securities investments and the outgo of funding) to measurement this REIT’s dividend-paying ability. During 2020, Arbor’s nett involvement income totaled $170 million, portion distributions paid connected communal banal totaled $142 million. That was a payout ratio of 84%. The institution has accrued its dividend for 9 consecutive years. Lichtenfeld said helium was impressed with the gait of dividend increases. The payout accrued 8% successful 2020, pursuing double-digit increases during the erstwhile 3 years, according to FactSet.
Investors Bancorp Inc. ISBC, +1.17% of Short Hills, N.J., has a dividend output of 3.85%. During 2020, the company’s nett involvement income totaled $726 million, portion dividends paid connected communal shares totaled $113 million, making for a payout ratio of lone 16%. The institution has raised its payout 7 years successful a row, with a 9% summation successful 2020, pursuing double-digit increases the erstwhile 4 years.