When searching for dividend stocks, consistency counts. While dividend yield is important, strong cash flow that can support steady dividend payments is equally critical. Companies with bulletproof balance sheets, therefore, offer investors greater stability and performance over the long term. Strong balance sheets usually demonstrate sizable free cash flow for the firm (FCFF) and free cash flow to equity (FCFE) characteristics.
A company’s balance sheet provides a snapshot of its financial health, such as assets and liabilities. The balance sheet can be evaluated along several criteria, such as capital adequacy, asset performance and overall capitalization. These criteria help income investors determine whether a company is healthy enough to support steady dividend growth over time.
The Importance of Cash Flow
A company’s balance sheet provides critical information about its cash flow. FCFF provides a snapshot of the net amount of cash a company generates after expenses, taxes and other deductions.
FCFE is a measure of financial performance that looks at how much cash can be paid to shareholders after expenses, reinvestment and debt payments. In other words, it measures equity capital usage.
Without cash, companies wouldn’t be able to fund dividend payments. In this sense, a company’s income statement, balance sheet and cash flow statement are all interconnected. Whereas the income statement expresses how assets and liabilities were used in the accounting period, the cash flow statement describes the cash inflows and outflows. It is, therefore, the cash flow statement that reveals how much cash the company has in its possession. This information is also presented in the balance sheet. Investors must use all three statements to get a holistic picture of a company’s financial health.
5 Companies with Bulletproof Balance Sheets
Below are five dividend stocks that boast strong cash flow and investor-friendly shareholder policies.
Apple Inc. (AAPL )
When it comes to pristine balance sheets, it’s difficult to ignore Apple, the world’s most valuable company. At the end of 2016, Apple had more than $216 billion in combined cash and investments. In a low-growth economy with very few certainties, AAPL stock provides strong protection. Apple’s current dividend yield of 1.87% puts it slightly above the average for the technology sector. It has a payout ratio of 25.6% and has seen its dividend grow since 2013. While dividend investors might hesitate to enter a stock in such a fast-changing industry, APPL arguably has the world’s most loyal fan base that is eager to consume each iteration of its products.
For Apple’s full dividend history, click here.
Microsoft Corporation (MSFT )
Microsoft is one of the world’s largest software makers that happens to boast more than $113 billion in cash and short-term investments. Based on year-end fiscal data, this gave MSFT one of the world’s highest cash and investment totals. With an above-average stock yield and strong history of dividend growth, MSFT is widely considered to be one of the best dividend plays in the technology sector. Its current payout ratio is 52.5% with an annualized payout of $1.56.
MSFT’s dividend history can be obtained here.
Find out what a payout ratio is and how you can calculate it.
Cisco Systems (CSCO )
With more than $65 billion in cash and short-term investments, Cisco Systems Inc. is one of the investing world’s cash kings. Over the years, it has joined the growing list of technology stocks that have become more dividend friendly. The company has boosted its dividend yield at a fast rate, and it has the capacity to reward shareholders with even bigger increases. With a payout ratio of 48.1%, CSCO has been a consistent dividend grower for six years. The stock currently boasts a dividend yield of 3.36%, more than double the technology sector average.
Sometimes a company might display a negative payout ratio. Find out what negative payout ratios are here.
Johnson & Johnson (JNJ )
Johnson & Johnson is a stalwart of the consumer products industry that has also been a dividend grower for the past 54 years. The company has more than $38 billion in cash and short-term investments on hand. With a payout ratio of 45.6% and an annualized payout of $3.20, JNJ is a major industrial leader with little debt on its books. Little debt to worry about means more money and greater growth opportunity for shareholders. This is especially critical as interest rates begin to rise, straddling many companies with higher expenses.
To review JNJ’s dividend history, click here.
3M (MMM )
When it comes to dividend growth, 3M Co is an exemplar of consistency. At $2.68 billion, MMM has a smaller cash total than other companies on this list, but makes up for it with a diversified business model with strong fundamentals and a long history of dividend payments. The industrial giant, which so happens to generate half of its revenue from consumables, has a dividend yield of 2.5% and an annualized payout of $4.44. The company has grown its dividend each year since 1959, and currently has a payout ratio of 51.4%. MMM not only has consistent revenue, its net earnings and inventory levels are in synch with one another, demonstrating a strong competitive advantage.
The Bottom Line
Two of the five stocks mentioned above are rated very high by DARS, our proprietary rating system. To learn more about the highest-rated stocks, check out our Best Dividend Stocks list. Every company in the list is expected to grow earnings and dividends in 2017.
More than 100,000 investors have subscribed to Dividend.com Premium. As a premium member, you receive a daily dividend newsletter briefing you on the latest happenings in the dividend world. Go premium for free by starting a free 14-day trial.
