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It appears there are plenty of things in the economy one can worry about these days.
To start, the Commerce Department has said that second-quarter economic growth was just 1.2%, well below expectations. So, we now have economic growth tracking at a 1% rate for 2016. This is the weakest start to a year since 2011.
JPMorgan Chase has put the risk of a recession in the United States at 30%. For its part, the Federal Reserve has said it plans to keep rates lower until we see more improvement in the economy. That means high dividends will still be in demand as investors remain hungry for yield.
Jeffrey Gundlach, founder of DoubleLine Capital and “bond king,” is still worried about the economy. In comments recently, Gundlach said that stocks look a bit frothy, going as far as to say, “Sell the house, sell the car, sell the kids. That’s exactly how I feel: sell everything.”
Fund managers are also taking the hint, moving out of equities and stocks. The equity allocation for funds haven’t been this low since 2011. The move to cash is real; however, it might be a bit premature to go to all cash when you can still find opportunities in safe dividend stocks.
Here are the top three safe dividends you can count on in this market:
No. 1 for Safe Dividends: Cisco Systems (NASDAQ: CSCO)
Cisco is the first name on our list, and the largest. This $150 billion market cap company is trading at just 13 times next year’s earnings estimates. It has a solid balance sheet that more than supports its dividend. Speaking of, its dividend yield is a healthy 3.4%.
Cisco has a huge cash balance that is nearly triple its debt load. The real beauty is that Cisco is shifting toward a subscription-based business, which provides steady recurring revenues. As well, the move toward subscriptions and software means higher margins; just more money for dividends.
No. 2 for Safe Dividends: Reynolds American (NYSE: RAI)
Reynolds American is one of the leaders in the tobacco industry, offering a 3.4% dividend yield. While many shun the tobacco industry, there’s something to be said for their consistent outperformance. Plus, Reynolds American has a six-year streak of dividend increases.
Reynolds’ top brands include Camel, Newport and Natural American Spirit. Reynolds isn’t just betting on cigarettes, but also the faster-growing vapor markets with its VUSE brand. As well, it owns over 30% of the snuff market with its Grizzly brand. The acquisition of Lorillard, which gave Reynolds the Newport brand, should also help with cost savings.
No. 3 for Safe Dividends: Dow Chemical (NYSE: DOW)
Dow Chemical is a leader in the agriculture and chemical industry. Dow also offers a juicy 3.4% dividend yield. It’s managed to up its dividend for five straight years and is only paying out roughly 50% of its earnings as dividends.
Dow has been benefiting from the lower energy and materials costs. Then there’s the planned merger with DuPont (NYSE: DD), which will make it a powerhouse. However, it plans to unlock value by combining certain segments and creating two entirely new companies: Dow Corning and Dow DuPont. This merger is expected to save millions of dollars in synergies.
In the end, not all dividends are created equal. It’s about digging deep to find the “safe” ones that can continue to outperform in any economic environment.