5% Dividend Yields You Can Believe In

Tuesday it was J.P. Morgan (JPM). Last week, CBS (CBS). The week before, Dow Chemical (DOW).

Dividend cuts seem epidemic. On Feb. 5, even before the aforementioned companies announced cuts, Standard & Poor’s said it expected payments for companies in its 500-stock index to shrink 13.3% this year. That would be the sharpest contraction since World War II.

But for dividend investors the news isn’t nearly as bad as it appears, for three reasons. First, cuts are largely concentrated in a single, troubled sector. Of 82 companies in the S&P 500 that have cut payments since the start of 2008, more than two-thirds are financials. Second, while the overall dollar amount of payments has declined, that’s owed mostly to cuts by a handful of giant banks. Since the start of 2008, dividend increases have outnumbered cuts among S&P 500 companies 4 to 1.

Third, a decade of puny yields has given way to almost plump ones. Over 10 years ending 2007, the S&P 500’s yield averaged 1.6%. A halving of stock prices in the past 16 months has boosted the index’s yield to 3.2%, based on S&P’s 2009 dividend forecast issued Feb. 5. Over the past two centuries, stocks have carried an average dividend yield of close to 5%.

Index investors will have little trouble capturing the market’s newly generous yield. Stock pickers must use more caution, since cuts have become more difficult to predict. One standard tactic -- making sure a company’s dividend doesn’t consume too much of its profits — doesn’t always apply. Intel’s (INTC) adjusted earnings per share this year are expected to plunge 55% to 41 cents, 15 cents less than its annual dividend, putting payments in seeming danger. But the company holds net cash of more than three years’ worth of dividend payments, likely more than enough to wait out an earnings rebound.

Ultimately, growth strategies may trump payment ability when managers decide whether to scrap dividends. Pfizer (PFE) had more than enough spare cash and yearly cash flow in January to support its 8% yield, but cut payments in half to afford a $68 billion purchase of rival Wyeth.

Not even a long history of dividends is a sure guide. Dow Chemical hadn’t cut its dividend in 97 years before Feb. 12.

To select the six companies below, I looked for 5% dividend yields among companies with stable sales and profits and strong balance sheets, while making sure dividend payments make up not more than three-quarters of this year’s earnings forecast. I ignored banks, as well as manufacturers like General Electric (GE) that have big financial operations. (And I didn’t resort to cheating by selecting real estate trusts or bond funds.)

Consolidated Edison (ED) shares have lost 20% in 10 years without dividends but have made 35% with them. The stock’s yield, now 6.3%, and the stable nature of regulated power distribution have helped ConEd stockholders beat the broad market by more than 30 percentage points over the past year.

Verizon’s (VZ) broadband income is picking up at the same time its landline phone business is shrinking. The net result is modest sales growth and mostly flat profits. Shares sell for just 11 times earnings and yield 6.4% -- enough to double an investor’s money in about 11 years, assuming reinvested payments and a flat stock price.

Pitney Bowes (PBI) recently boosted its yearly dividend four cents to $1.44 a share. Current yield: 7%. Sales and profits for the maker of mail and document management equipment are expected to dip 5% this year, but shares seem more than adequately discounted at less than eight times earnings.