3 High-Yield, Low-Risk Dividend Stocks for Extreme Safety

NEW YORK (TheStreet) -- When it comes to times of uncertainty and volatility, nothing beats "widows and orphans" stocks. What are they? They are dividend stocks with high yields and minimal risk as compared to other stocks.

Widows and orphans stocks got their name because they are considered stable enough to provide reliable dividend income to "feed the family" of widows and orphans if the breadwinner is gone. The term "blue-chip stock" has come to have virtually the same meaning as widows and orphans stocks.

This article takes a look at three widows and orphans dividend stocks for investors looking for a mix of high yield and safety.

1. PepsiCo

PepsiCo (PEP) has paid increasing dividends for 43 consecutive years. The company is among the safest businesses to invest in. PepsiCo's widows and orphans-level safety comes from its well-known branded food and drink products.

In total, PepsiCo has 22 brands that generate over $1 billion per year in sales. The table lists those brands by category.

Carbonated Beverages

Non-Carbonated Beverages

Snacks & Food

Pepsi

Gatorade

Lay's

Diet Pepsi

Tropicana

Doritos

Pepsi Max

Litpon

Quaker

Mountain Dew

Aquafina

Cheetos

Diet Mountain Dew

Brisk

Ruffles

7 Up

Starbucks RTD Beverages

Tostitos

Sierra Mist

 

Fritos

Miranda

 

Walkers

 

While the company is named after its soda, the snack and food brands now generate more operating income for the company than its beverages.

PepsiCo currently has a dividend yield of 2.9%. The company has paid increasing dividends for four consecutive decades and hiked its dividend 15% in 2015.

For a company to grow its dividend payments year after year, earnings per share must grow. PepsiCo had adjusted constant-currency earnings-per-share growth of 9% in fiscal 2014. Over the last decade, PepsiCo has managed to grow its revenue per share and dividends per share at around 9% a year.

PepsiCo is expecting 7% constant-currency core earnings-per-share growth in fiscal 2015. PepsiCo will very likely continue to grow at between 7% and 9% a year based on its 2015 guidance and historical growth numbers.

PepsiCo ranks highly using the 8 Rules of Dividend Investing thanks to its relatively high earnings-per-share growth rate and low stock price standard deviation. The company has a stock price standard deviation of just 17.3%. PepsiCo investors can expect a total return of between around 10% and 12% a year from dividends (~3%) and earnings-per-share growth (7% to 9%).


2.  Johnson & Johnson

Johnson & Johnson (JNJ) is another excellent choice, scoring high marks for safety while increasing its adjusted earnings per share for 31 consecutive years.

J&J has achieved its sustained success through wide diversification within the health care industry and geographically -- The company now generates more revenue outside the United States than inside. The company's three segments are:

  • Consumer segment: 20% of total revenue
  • Medical devices segment: 37% of total revenue
  • Pharma segment: 43% of total revenue
Despite its portfolio of well-known branded consumer products, the medical devices segment generates 85% of sales and is the company's second largest based on revenue generated.

Over the last decade, Johnson & Johnson has grown earnings per share at 6.1% a year. The company is projecting EPS growth of just 2.4% in fiscal 2015 due to the strengthening dollar. Excluding currency effects, Johnson & Johnson will likely generate EPS growth around 6% to 7% in fiscal 2015. Shareholders should expect EPS growth of 5% to 7% a year, in line with its historical averages.

In addition to 31 consecutive years of earnings-per-share increases, Johnson & Johnson has also managed to increase its dividend payments for over 50 consecutive years, making the company a Dividend King. J&J has a stock price standard deviation of just 16.2%, lower than high-quality utility stocks like Southern Company (SO) and Consolidated Edison (ED).

Johnson & Johnson stock currently has a dividend yield of 3%, which, combined with that 5% to 7% expected EPS growth, gives J&J investors an expected total return of 8% to 10% a year.


3. Kimberly-Clark

Kimberly-Clark (KMB) manufactures and sells well-known disposable consumer products. The company owns five brands that generate $1 billion or more per year in sales: Kleenex, Kotex, Huggies, Pull-Ups and Scotts. 

Kimberly-Clark has increased its dividend payments for 43 consecutive years. The company's ability to continuously raise its dividend payments indicates a strong competitive advantage that comes from strong brand names and its global distribution network.

Kimberly-Clark has grown its share of the adult care market from 51% in 2009 to 59% due to strength in its Kotex, Poise, and Depend brands. In addition, Kimberly-Clark controls 39% of the baby and child care market through its Huggies, Pull-Ups, GoodNites, Little Swimmers brands.

Kimberly-Clark realized 8% constant-currency earnings-per-share growth in its most recent quarter; it has generated EPS growth of 5.2% a year over the last decade. The company is streamlining its supply chain and also spun off its slower-growing health care division into Halyard Health (HYH) in November 2014. Over the long run, Kimberly-Clark will likely generate total returns of 8% to 12% a year. Total returns will come from the company's dividend payments (~3%) and earnings-per-share growth (5% to 9%).

Kimberly-Clark's long dividend history and high-quality branded products in slow-changing industries make the company an ideal widows and orphans stock. The company currently has a dividend yield of 3.2% which should appeal to income oriented investors. In addition, Kimberly-Clark has a low stock price standard deviation of just 17.3%.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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