4 Dividends With a High Margin of Safety

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Let's be honest: Sometimes cash speaks louder than words. As an investor, you understand the importance of reinvesting dividends. With the economy still struggling, owning stocks that pay a reliable dividend could be the difference between making money in the market and falling flat.

However, investors hunting yield, and yield alone, are often disappointed when the company can no longer maintain its dividend payouts. To safeguard against this, I scoured the market for dividend plays with debt-free balance sheets -- a margin of safety that's not enjoyed by highly leveraged companies.   

Safety first
These stocks are less risky, because their strong balance sheets offer reassurance that the dividend in question is safe. Feast your eyes on four quality companies, with no long-term debt on the books and yields well above the 2% that 10-year Treasuries pay:

Company

Dividend Yield

Payout Ratio

Accenture (NYS: ACN) 2.3%33%
General Electric (NYS: GE) 3.5%49%
Johnson & Johnson (NYS: JNJ) 3.5%64%
Paychex (NAS: PAYX) 4.1%84%

Source: Yahoo Finance.

The quality of a business is just as important as the dividend it pays. Let's take a peek at what makes these stocks worthy of your portfolio, other than their stellar financial performance. What all of these companies have in common is the ability to grow future cash flow.

Accenture is a management consulting, technology services, and outsourcing firm that serves clients in more than 120 countries. With no debt, the company has $5.1 billion in cash on its books. In its most recent quarter, Accenture enjoyed double-digit growth across all five of the company's operating groups in local currency terms, as well as over its three geographic regions. Because Accenture's job is to help struggling companies perform at their best, its services are in high demand during an economic downturn -- making it a winning play today.

A history of payouts
General Electric's been paying a dividend since 1899 -- that's more than a hundred years of returning cash to shareholders. As one of the most diversified industrial companies in the world, GE operates as a global technology, service, and finance company. Increased demand for GE's energy business should power earnings growth in the years ahead. Toward the end of 2011, GE revealed $3 billion in new customer agreements for its energy segment. With global demand for alternative energy set to grow 53% by 2035, GE should benefit from its position in the sector.

Aviation is also driving growth for the company. GE experienced record orders in 2011 for its new jet engines, including Boeing's (NYS: BA) commitment for 400 GE90 engines for the Boeing 777 jets. Boeing recently landed a deal with Indonesia's Lion Air for 201 of Boeing's 737 MAX planes. Boeing's next-generation MAX jets will be powered by GE's LEAP-1B engine, which GE says are valued at $4.8 billion. Overall, 2012 should be a strong year for the industrial giant.

A Dividend Aristocrat
Next up is Johnson & Johnson, a steady blue chip with reliable earnings. J&J makes my list as one of the most attractive Dividend Aristocrats. For those unfamiliar, Dividend Aristocrats are companies that have paid and increased their dividend for at least 25 consecutive years. For a company to continue raising its dividend through an economic downturn says a lot about the priorities of that business.

As a worldwide leader of healthcare products, J&J may face a tough year ahead caused by a weak global economy. A string of recent recalls across its iconic brands -- including Tylenol -- hasn't helped either, although J&J's rock-solid balance sheet should keep it on task with dividend payouts. With 49 years of straight dividend increases, J&J is an excellent bet for buy-and-hold investors.    

One for the money
Rounding out the group is our final pick: Paychex. The payroll-processing company has been hurt lately by high unemployment rates. However, management continues to create value through smart acquisitions. The company scooped up SurePayroll and ePlan last year, which have strengthened Paychex online offerings as well as its mobile capabilities. Those purchases should add value to the business going forward as a growing number of companies handle payments online and on mobile devices.

Additionally, new product offerings are speeding down the pipeline. Paychex recently launched its new HR Essentials service as well as SmartTime, which is a time and attendance product for small businesses. With solid financials, Paychex will likely continue to grow its annual dividend going forward.   

Final thoughts
These are solid stocks whose growing dividends will help them outperform the market this year. For more money-making opportunities I encourage you to read this special free report from The Motley Fool: "Secure Your Future With 11 Rock-Solid Dividend Stocks." This is a great read for investors looking to boost their returns with strong dividend plays. For instant access to this free report, click here now.  

At the time this article was published Foolish contributor Tamara Rutter does not own shares of any stocks mentioned in this column. Follow her onTwitter, where she uses the handle@TamaraRutter, for Foolish investing ideas. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Paychex, Johnson & Johnson, and Accenture, as well as writing a covered straddle position on Paychex and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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