Companies with strong balance sheets and high dividends will end up as one of the few safe harbors for investors if the economy continues to cool. It is hard to imagine how the recent stock market rally can continue if July's jobless figures show little employment growth, third quarter GDP expansion looks weak, and home prices continue to drop.
A number of publicly traded firms with attractive share yields may have to cut those dividends if their earnings are damaged for the rest of the year. Big U.S. banks, which have only recently reinstated payouts, face difficult quarters as bad loans for homes and credit cards remain relatively high, and investment bank income drops as M&A, corporate finance and equity finance deals slow. Proprietary trading operations, once the most profitable divisions of financial firms, have been spun off due to financial reform regulations. Transportation companies, such as airlines like Southwest (LUV), will also face margin pressure because of high fuel costs. Retails may take a double hit because of high prices for commodities like cotton and a drop in store traffic due to falling consumer confidence.
Still, there are a few large companies with high yields that will almost certainly keep dividends as they are. These have ironclad balance sheets and cash flow which is not likely to be undermined badly even if the economy falters.
McDonald's (MCD) has returned billions of dollars to shareholders in the last five years through both dividends and share buybacks. Its yield is nearly 3%. Earnings may be hurt by recession-related same-store sales weakness, and high commodities prices may hurt margins, but the company can afford to keep investor returns strong.
GE(GE) was forced to shave its dividend when the credit crisis damaged earnings at its financial unit. That division has been restructured since then. Its core energy and services infrastructure businesses haven't been growing quickly, but they have been growing, and GE's earnings have improved consistently since the depths of the recession. Its current yield is 3.2%
Exxon Mobil (XOM) is likely to continue to benefit from the high price of crude. Even when the economy slowed and oil prices dropped in 2009, Exxon made more than $11 billion. The stock's current yield is 3.2%.
Intel (INTC) continues to control about three-quarters of the PC and server chip markets worldwide, and it has launched a foray into the rapidly growing business of manufacturing chips for wireless devices and tablets. PC sales are likely to continue to slow, but its server business should stay strong as cloud computing increases the demand for servers. Intel has joined a number of large tech companies which have added dividends or increased existing payouts as share price growth has slowed. Intel yields 3.1%.
Get info on stocks mentioned in this article: