Nearly every retirement portfolio on the planet is reeling from the coronavirus fallout. Recoveries are going to vary widely, however, depending on the safety of the dividends in each basket.
If your income stream is safe, then youre well ahead of the game. When stock prices recover (and they will, as every bear market eventually gives way to a new bull), your portfolio is going to bounce right back. Assuming the payouts didnt miss a beat, then you can rest assured youve got an uninterrupted income stream between now and then.
The bad news, however, is that cuts to dividend payouts have already started, with Ford (F) suspending its payout last Thursday. Then theres Boeing (BA), which was a basket case before the coronavirus outbreak. The companys dividend yield surged to 8.4%
right before the company suspended it on Saturday.
Those are just two obvious tickers to dump now, if you havent already. Well name four more shortly.
First, though, lets talk about that one-step dividend safety check you can perform on your stocks right now.
Performing this simple test will help secure your income stream and, if it leads you to sell any laggards, free up cash for the fantastic buying opportunities well see in the weeks and months ahead (I cant stress this enough, and Ill be flagging these deals of the decade for you in my Contrarian Income Report service).
Your 1-Click Dividend Safety Check
Im talking about checking the payout ratio on each of your holdings. If youve been buying dividend stocks for a while, you likely know the payout ratio. You calculate it by dividing the total amount of dividends paid by the companys last 12 months of net income.
Generally speaking, if youve got a stock with a payout ratio of 50% or less, its dividend is likely safe. As you climb closer to 100%, the payouts safety falters.
But theres a problem with this formula, and its on the net income side of the ledger. Put simply, net income is an accounting creation. It can be easily manipulated to overstate cash-flow generation. But it can, at times, understate it, too.
Take insurer Chubb Inc. (CB), for example. It recently popped up on a Barrons list of high-quality, defensible dividends due to its low net incomebased payout ratio: a mere 30.4%.
However, this is one case where net income is understating cash flow: the insurers free cash flow payout ratio is even better: just 21.4%. And that ratio has actually been moving lower in the last three years:
A Safe Dividend Gets Safer
In other words, Chubb could double its payout tomorrow and still stay well below our 50% safety line.
But lets back up a second: what do we mean by free cash flow payout ratio?
Free cash flow (FCF) tells you how much cash a company is generating once its paid the cost of maintaining and growing its business. You calculate it by subtracting capital expenditures from a companys cash flow from operating activities (both figures are available under the Financials tab on Yahoo Finance). Its a much more accurate view of the cash a company is generating than net income.
Were going to get into four stocks with dangerous free-cash-flow payout ratios in just a few moments more. First, though, lets square the circle on Chubb.
Coronavirus No Match for Chubbs Dividend
If youre looking for a safe-dividend checklist (and who isnt these days?), Chubb provides us with a few other strong points to look for.
Aside from its safe FCF payout ratio, the company also boasts rock-solid dividend history: Chubb is a member of the Dividend Aristocrats, the 57 US companies that have raised payouts for 25 years or more (including many previous crashes, such as the financial crisis, the dot-com bust and 9/11).
And on February 27, well after the market had already started falling from its February 19 peak, Chubb rolled out another hike, to the tune of 4%. Thats a pretty strong statement from management.
Finally, the payout is backed by Chubbs strong balance sheet, with $15 billion of long-term debt, as of December 31just 8% of its $177 billion in assetsand $5.8 billion of cash on hand.
Now lets wrap up with a look at those four dangerous dividends I mentioned earlier, as measured by their FCF payout ratios.
4 Dangerous Dividends to Dump Now
Western Digital (WDC) has taken a double hit from the coronavirus, with demand for its memory chips falling in China first, and now, with the outbreak in Europe and North America, in those markets, too. Meantime, WDCs cash holding is shrinking as its dividendunsustainable through cash flowis paid out of pocket.
WDCs Dwindling Cash Cushion
Next, its no surprise that Wyndham Hotels & Resorts (WH) is taking a hit from the coronavirus, prompting the company to withdraw its outlook for 2020. Given that it was already paying 224% of cash flow as dividends as of the end of December, we can assume this payout is on borrowed time.
Abercrombie & Fitch (ANF), meanwhile, shuttered all its stores outside the Asia-Pacific region on March 15. It will continue to sell online, but faces a lot of competition in that space, as well. The dividend, which consumes 154% of FCF, seems likely to be cut to save cash.
Finally, ExxonMobil (XOM), whose dividend was already in jeopardy before the double hit of the coronavirus and the oil-price war hit. Dont gamble on this 10% yield. Its a trap ready to spring.
Forget Chubb: Buy These 5 Recession-Resistant Dividends (Up to 13%!) Now
Theres just one problem with buying Chubb now: even with the pullback, youre still only getting a 3% dividend yield here!
Thats pretty meager when you consider that the stock (in blue below) has fallen much further than the S&P 500 this year:
A 3% Payout Is Little Solace for This
Now, if Chubb were offering a huge dividend yield to lure investors back in, I might be able to overlook this chart.
But why would you buy Chubbs 3% dividend when there are so many stocks paying a lot more right now?
Like the 5 far better recession-resistant picks Ill show you right here. Theyll help tone down your portfolios volatility nowand when the crisis passes, these 5 picks are perfectly positioned to soar.
Just how big are the dividends were talking about? The lowest of the bunch clocks in at a solid 6.3% yield. The highest? An incredible 13%!
With payouts like thatand Treasuries yielding less than 1% nowyou can bet that investors will storm into these plays when the market starts to find its footing.
In fact, Im betting these 5 stout dividends will lead the rush higher in the (inevitable) rebound. And while you wait for that to happen, youll be banking their solid 6.3% to 13% dividends!
Dont miss out. Click here to get full details on each of these 5 recession-resistant 6%+ dividend payers now. Youll get their names, tickers, buy-under prices, complete dividend histories and everything else you need to buy with confidence.