2 Great Dividends for the Beginning Investor

John Grgurich, The Motley Fool
Updated

It doesn't matter if you're new to investing or have been doing it for a lifetime -- it's important you understand a company's business model. And frankly, the simpler the business model, the better.

In that spirit, today we're going to look at two companies with great dividends and easy-to-understand business models. They've all been around for a while and look like they're here to stay. Because what good is a great dividend if the company's not going to be here to pay it out? Without further ado, then:

1. Kellogg (NYS: K)
Yes, that's Kellogg's, the cereal company from your -- and everyone else's -- childhood. It's the renowned maker of such breakfast favorites as Corn Flakes, Frosted Flakes, Raisin Bran, and Special K. Beyond cereal, the company makes Pop Tarts, Eggo waffles, and Nutri-Grain bars. This is clearly a company that has touched most consumers' lives at one time or another, and, after more than 100 years, is still going strong. By the numbers:

  • We like to see dividend yields of around 3%: It's an arbitrary threshold, but one we feel separates the wheat from the chaff. At 3.3%, Kellogg easily makes the grade. With a dividend yield of 3.2%, longtime rival General Mills (NYS: GIS) is actually pretty competitive on this metric.

  • We like to see dividend-payout ratios of 50% or less: The lower the percentage, the more sustainable it is. At 49%, Kellogg's is perfect. General Mills, at 50%, is also right in the pocket.

  • Gross margin is an indicator of brand strength and pricing power. At 41.36% over the trailing 12 months, Kellogg has the edge against General Mills' 37.05% TTM.

  • Finally, quarterly earnings for Kellogg was a big 22.8% year-over-year, trouncing General Mills, which lost 27.5% over the same period. Granted, General Mills was working to integrate the Yoplait acquisition.

At $52 per share, Kellogg is reasonably priced for the average investor, and the price-to-earnings ratio of 15 tells you it's fairly priced to past earnings. And it's a great repeat business, i.e., you finish your box of Frosted Flakes or Eggo waffles and go right out and buy another. Beautifully simple and reliable. So just like your mom always told you, keep eating your cornflakes and keep Kellogg's on the top of your list for strong, dividend-bearing investments.

2. Mattel (NAS: MAT)
Hot Wheels, Matchbox, Ken and Barbie, Fisher-Price, Tyco, Uno. Minus Ken and Barbie, Mattel's products are a walk through my childhood. In addition to these classic brands, Mattel is also responsible for two of the hottest new toy collections: Monster High and American Girl. This is another beautifully simple business model: Kids want new toys, and when they grow up, there's another generation coming up right behind them. By the numbers:

  • We said we like to see yields of around 3%. Mattel's 3.8% nicely clears the fence. Peer Hasbro's (NAS: HAS) 4.2% is also nothing to complain about.

  • Mattel's payout ratio is a gentle 42%, as is Hasbro's 41%.

  • Mattel's gross margin is a healthy 50.2% over the trailing 12 months, edging out Hasbro's 48.4%.

  • Quarterly earnings for Mattel grew at a very healthy 14% year over year, with Hasbro's down 0.6%.

At $33 per share, Mattel is another reasonably priced stock for the average investor, and the price-to-earnings ratio of 15 tells you it's fairly priced. Mattel is another strong company with a simple, reliable business model and a great yield to match.

11 more rock-solid dividend stocks
There you are: two great companies with business models any investor can comprehend, and stocks that offer some of the market's best, most sustainable dividends. If today's column has left you wanting more, check out this free Motley Fool special report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." The title says it all. Get your copy while the stocks are hot by simply clicking here now.

At the time thisarticle was published Fool contributor John Grgurich is looking at a Matchbox replica of a Mini Cooper right now, but unfortunately doesn't own the real thing, nor does own no shares of any of the companies mentioned in this column. Follow John's dispatches from the front lines of investing on Twitter: @TMFGrgurich. Motley Fool newsletter services have recommended buying shares of Mattel and Hasbro. 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 scintillating disclosure policy.

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