2 Extremely Safe Dividend Stocks

Indeed, a reliable business with a rock-solid dividend is practically certain to deliver profits in the long run.

 

But knowing which companies fit this bill isn’t always so easy. But fear not: here are two extremely safe dividend stocks that should continue to perform well even if the economy takes a downward turn.

 

 

Pharmaceutical giant Pfizer has been a longtime favorite of income investors for several decades now.

 

The company’s colossal cash flows – as well as its history of consistent dividend payments – make the stock virtually a guaranteed bet for dispensing a steady stream of distributions to its appreciative shareholders.

 

Propping up Pfizer’s status as a respected dividend brand is its fantastic performance over the last couple of years. The firm was a big winner due to the revenues gained from the rollout of its COVID-related products, and it’s still seeing strong momentum from that initiative today.

 

For example, one of its vaccine offerings, Comirnaty, propelled its top-line income to unprecedented levels in 2021, roughly doubling its sales from the previous year to around $81 billion.

Furthermore, together with its other COVID drug, Paxlovid, the company’s been making annualized revenues from the two products of nearly $70 billion so far in 2022 – more than any other yearly sales earned from the entire business before the outbreak of the pandemic.

 

Crucially, its superior performance also means its dividend is exceptionally safe. Not only has Pfizer been paying it for 32 years now, but it’s also been increasing it for the last twelve years as well. It can do this because it has a low payout ratio of just 26%, which is undoubtedly reflective of the 100% growth in adjusted diluted EPS it recorded during the most recent financial quarter.

 

On top of that, the firm’s profit margins are monstrous. It boasts a trailing twelve-month (TTM) net income margin of 29%, while its EBITDA fraction grew at a rate of 122% the last year. Its valuation is appealing, too, with a low price-to-sales multiple today of 2.5x.

 

However, the tailwinds the company enjoyed from the coronavirus crisis aren’t certain to last. In fact, it looks like Pfizer’s going to get bogged down in a messy patent dispute with rival Moderna, which isn’t expected to resolve itself anytime soon.

Things could also get worse, with some studies showing that its Paxlovid antiviral pill might not be as effective as once thought. Yet, while these developments could cause headaches for Pfizer, they are par for the course for any major drug manufacturer – and not something that would ultimately break the company as a going concern.

 

All things considered, a good dividend stock lives or dies by the strength of its underlying business. One astonishing aspect of Pfizer’s operation is the return it generates on its total capital employed.

 

Indeed, for an industry where the median return is -30%, Pfizer’s +15% is simply amazing. The company can achieve this with its “strong focus on early-stage opportunities,” as well as its willingness to deploy resources at any stage of development too.

 

Pfizer’s portfolio of leading products will ensure it remains a cash-generating behemoth, which is essential to maintain its excellent dividend payment well into the future.

 

At first glance, Costco’s low dividend yield might make some investors think twice about purchasing its stock.

 

The big-box retail store offers shareholders a distribution yielding just 0.69%, a number that’s well below the average TTM yield of 1.33% for other Nasdaq companies right now.

 

However, if you look a little closer, Costco’s dividend is pretty attractive for a whole host of other reasons.

 

To begin with, Costco has a very low payout ratio at just 25% of its net income. This means the company’s only using a relatively small fraction of its profits to pay for its dividend distribution.

This is good news for investors. High payout ratios are generally associated with lower stock prices and growth potential, whereas low payout ratios offer greater long-term promise for price appreciation and capital gains. Over time, this tends to outweigh the short-term benefits of high-yielding stocks.

 

Moreover, Costco’s low payout ratio ensures that any future growth plans are funded without removing excess earnings from its shareholder base. The result is ongoing investment in the company, allowing for various flywheel effects to take hold.

 

In addition to its excellent payout ratio, Costco’s also been raising its dividend at a rapid clip lately. The firm has a TTM one-year dividend growth rate of over 13%, which is almost exactly in line with its forward revenue growth rate too. In fact, the company’s low payout ratio probably helped spur its long-term dividend growth, leaving the firm with more room to increase its cash dividend whenever it decides to do so.

 

From a fundamental perspective, Costco continues to thrive in what is an especially difficult macro environment. The company recently registered 14.9% comparable sales growth in the third quarter, with e-commerce up 7.9% on an adjusted basis.

 

However, there are still a few risks associated with buying Costco stock. The brand’s profitability metrics are poor, managing only to register an EBITDA margin of 4.63%. Furthermore, its shares trade at a forward earnings multiple of 40x, while its price-to-cash flow ratio is also high at 29x.

 

That said, Costco likely justifies its high price premium. Investors have driven its stock value up by 25% since the start of June, and sentiment remains strong going forward.