- March 26, 2019
- Posted by: Trading
- Category: Market Overview
It’s almost impossible to predict the direction of the markets in the short-run. That inherent instability makes investing in equities a risky enterprise for the layman. But if your investment horizon is long-term, then buying solid dividend stocks from the mature end of the market, that are able to withstand economic downturns better than highly cyclical growth stocks, makes the most sense.
If you’re able to hold on to your investments during the thick and thin of the markets, the chances are that you’ll not only preserve your capital from the impact of inflation, but you’ll also make decent gains on your investment.
We’ve selected two super-safe dividend stocks that generate excellent free cash flow, maintain reliable payout ratios, and have management teams committed to rewarding long-term investors with healthy dividend increases.
Honeywell International Inc (NYSE:). (NYSE:HON) isn’t the kind of stock you’ll see people bragging about at dinner parties, but this industrial giant manufactures products that are crucial to every day life. Honeywell’s diversified portfolio provides a lifeline to many industries, including homes and building, aviation, defense and space, oil and gas, chemicals and automotive. The company’s enduring competitive advantage is so large that it’s hard to challenge its dominance.
For long-term income investors, it’s not a bad time pick this stock after the company successfully restructured its business and one of its major competitors, GE (NYSE:GE), is crumbling under a huge pile of debt. For the current fiscal year, Honeywell expects to record its highest profit margin in more than two decades, helped by robust demand in aviation parts and a booming market for warehouse automation equipment.
“We now have a simpler, more focused portfolio spread across six attractive end markets with approximately 60% of the portfolio growing sales at or above 5% organically for the full year,” Chief Executive Officer Darius Adamczyk said in a statement released with the company fourth-quarter earnings last month.
Together with this strong financial outlook, Honeywell also has an impressive track record when it comes to paying dividends. With a dividend yield of 2.1%, it’s $0.82 a share quarterly dividend has grown over 11% per year during the last five years. Honeywell has paid uninterrupted dividends for more than two decades, while maintaining a low payout ratio, currently at 49%.
With the shares up 8.8% in the past 12 months, to $155.83 at Friday’s close, this powerful combination of growth momentum, low payout ratio and successful restructuring signals that the company’s payout is safe and it’s well-positioned to reward its long-term investors.
Many investors see Microsoft Corp (NASDAQ:). (NASDAQ:MSFT) as a technology stock at the mercy of market forces and global growth. But in our view, the software mammoth is also a super safe dividend stock whose legacy businesses make it an excellent cash generator for income investors.
The company has captured an astonishing 82% of the desktop operating system market, which feeds massive amounts of recurring cash into its coffers. Office, which is now a subscription-based service for Microsoft’s millions of home and corporate users, continues to be a powerful driver of earnings.
The company has also grabbed a major share in the highly lucrative commercial cloud-computing market. Sales in that division grew 48% to $9 billion in the second quarter, reported in January, while margins in that business widened by 5 percentage points to 62%. This revenue diversification makes Microsoft unique among technology companies in offering investors both income and growth.
On the income front, Microsoft has an excellent track record. Since 2004, when it first began paying a dividend, the company’s payout has swelled nearly five times. Dividend growth has been supported by a low payout ratio and strong underlying businesses. The company has a dividend yield of 2.25% and pays quarterly dividends of $0.46 per share that have grown about 13% per year over the past five years.
Microsoft Weekly Chart
Microsoft Weekly Chart
But that doesn’t tell the whole story of the company’s success. Including dividend payments and capital gains, Microsoft has delivered 200% in total returns over the past five years. Its 40% payout ratio is safe and leaves a lot of room for future dividend growth. The shares have gained more than 34% in the past 12 months, and closed Friday at $117.05.
Investing to buy-and-hold means selecting companies that pay growing dividends, have lasting competitive advantage and manageable payout ratios that put them in a better position to weather market downturns and reward investors across different business cycles. Honeywell and Microsoft are two of the best income stocks long-term investors could consider to boost their portfolios.