Recent economic data could cause the Federal Reserve to raise interest rates. When this will happen is anybody's guess. When it does happens, however, stocks with big valuations could see a lot more volatility.
In building a portfolio or planning for retirement, we need to be ready. Here are some options.
This group of safe dividend stocks won't necessarily impress you with their dividend yields, but they offer attractive value. The key is their low payout ratios and rapid dividend growth.
If and when interest rates increase, these 10 dividend stocks could be a reasonably safe place to be.
1. Newell Brands (NWL)
Through a series of mergers and acquisitions, Newell Brands has built a brand-name empire in consumer and commercial products.
The Newell Brands portfolio includes the following names: Rubbermaid, Lenox, Goody, Contigo, Waterman, Parker Pens, Paper Mate, Sharpie, Dymo, Graco, Aprica, Marmot outdoor gear, K2 Skis, Volkl Skis and Baby Jogger.
These brands -- and others -- bring in a total of about $5.92 billion in annual sales. The range of brands is so diverse that at least one of them likely will turn up wherever people shop.
Walmart is one of the largest buyers of Newell Brands products. Having a wide range of well-respected brand names eases the path to negotiating with this price-sensitive customer. In the final analysis, Walmart sets the base price for most of Newell's products.
This company's competitive edge comes from strength in product design and manufacturing combined with efficient distribution and advertising.
The other secret to Newell Brands' success is its strong sales base. The company's brands dominate writing (30% of sales) and several categories of what's known as "homecare."
The current 76 cent-per-share annual dividend payout offers investors a 1.5% yield. In the past five years Newell has been improving cash flow and the payout ratio as well. During this time, dividends have compounded at a 30.6% annual rate.
On Oct. 12, Newell announced the $1.95 billion cash sale of its tool business. That cash will be a significant addition to the $627 million already in Newell's bank account, further strengthening the safety of its dividend.
2. Kroger (KR)
Kroger is the biggest U.S. operator of supermarkets and has more than 2,700 stores. It may not appear that way because of the diverse brands that Kroger owns, including Ralphs, Fred Meyer and King Soopers.
Also tucked inside Kroger are 782 convenience stores and 300-plus fine jewelry stores. From Cheerios to diamonds, Kroger presides over a growing business with nearly $110 billion in annual sales.
The retail supermarket business is known for heavy price promotions and ultra low profitability. Margins are thin.
The long-term trend has been toward consolidation of various regionally strong chains into fewer national leaders.
Organic grocers like Whole Foods and Sprouts have entered the business presenting new opportunities for Kroger. Organics are higher in price and carry better margins. Kroger has vastly expanded its line of organic products.
Kroger is fighting the battle with prices that are affordable to a mass audience. Even so, Kroger brand organics are priced at a premium level to other Kroger products. This is a subtle way to raise average selling prices.
The current 48 cents-per-share annual payout offers investors a 1.6% yield. The payout ratio is 23%. That's low and provides good support for the dividend.
Because Kroger operates in the supermarket business and has an operating margin of only around 3%, its low payout ratio provides a necessary cushion. Even so, investors may want to weigh the prospects for improvement.
At the end of last year, Kroger had $1.26 billion of cash, which is equal to more than three years of current dividend payments. Since 2006, dividend payments have increased fourfold. Kroger is also a member of the Dividend Achievers list, having increased its dividend more than 10 years in a row.
3. Canadian National Railway (CNI)
Canadian National owns almost 20,000 miles of track that connects Canada with all three coasts of the U.S., including the Gulf of Mexico.
It is a full-service outfit offering intermodal, trucking, freight forwarding, warehousing and distribution to all points in North America, including Mexico.
CNI handles more than $250 billion worth of cargo and hauls about 20% of Canada's exports.
It is safe to say the days of railroad building are long gone. So there is little risk of new entrants here. Competition comes for other transport modes like long-haul trucking and airfreight. Traditionally, rail transportation has offered the lowest cost of delivery for most products.
Among North American railroads, CNI ranks about fifth. It competes with the likes of Union Pacific and Burlington Northern in addition to various long-haul trucking companies.
Both Union Pacific and Burlington have strong west-east networks capturing a big chunk of the Asia-to-U.S. trade. CNI stakes is territory in connecting the whole of Canada with all of the North American free trade countries.
According to the U.S. Department of Agriculture, trade in Nafta countries over the past 20-plus years has increased nearly fivefold. So Canadian National Railway holds a pretty nice spot.
The current $1.12 per share annual payout offers investors a 1.8% yield. What may be appropriate for consideration is the safety and 10-year dividend growth rate of 17.5% per year.
The CNI bank account is not exactly flush, but with an operating margin around the 40%, there is plenty of cash flow to keep the trains running and still pay dividends.
The 41% free-cash-flow payout ratio hasn't changed much in the past decade either. This indicates dividend growth has been fueled by a growing business.
4. Union Pacific (UNP)
Union Pacific is North America's largest railroad. It owns more than 32,000 miles of track. This rail network connects customers on the Pacific and Gulf Coasts with the Midwest and the eastern U.S.
Virtually any and every commodity from agriculture, and chemicals, to finished goods can be transported to market through Union Pacific. Revenue benefits additionally from the recent rise in production of shale oil.
As long as there is trade within the U.S. or imports from abroad, there will be a need for getting products to market. Imports of finished goods from Asia continue to be an important and growing business. Rail transportation is the most cost-effective mode of delivery.
Union Pacific's biggest competitor is Burlington Northern, which is owned by Berkshire Hathaway. Having Warren Buffett as a competitor means serious business.
When consideration is given to the annual volume of Asian sources goods imported through West Coast ports, the pie is plenty big enough and is growing fast enough for both players.
The current annual payout of $2.20 offers a 2.5% yield. Over the last decade the payout has compounded at a very high 22% annual rate. Over the past five years, it has compounded at a 27.2% rate.
The current payout ratio is 44%. Consensus estimates point to 13% annual earnings growth in the years ahead. So there is reason to anticipate further dividend growth will follow.
Union Pacific is surprisingly profitable, with excellent cash flow, which allows the company to grow dividends rapidly. Operating margins are 37%. Operations brought in $8 billion in 2015 while capital expenditures were only $4.65 billion.
5. General Dynamics (GD)
You don't want to mess with General Dynamics as it is one of the top four U.S. defense contractors. This company make America's weapons. Of the nearly $32 billion in revenues, about 60% comes from defense business under contracts like the SSN 774 Class nuclear submarine, the Aegis destroyer and other Navy shipbuilding programs.
Supporting this business is a strong base in IT technology for weapons systems, intelligence and surveillance.
The other side of General Dynamics is aerospace. Think G6 because Gulfstream is part of this action along with aircraft services, maintenance and aircraft customization work.
The defense contracting business has huge walls around it. Getting approved to enter the bidding game is time and paperwork intense. Military defense takes up about 14% of GDP and that means there are a ton of contracts large and small.
In the critical areas where General Dynamics competes, there are relatively few competitors. Each of the top 10 players tends to focus on different parts. For General Dynamics, its strength is with the Navy.
The current $3.04-per-share annual payout offers a 2% yield. While not the most impressive yield, investors may want to consider the extreme safety of the dividend and its 20-year annual dividend growth rate of 10.4%.
The current 51% free-cash-flow payout ratio is above the longer-term average in the mid-20% area. Since cash flow can be affected if the company receives payments under contract milestone agreements, this ratio could moderate going forward. Either way, General Dynamics' dividend is very safe with great growth prospects.
6. Parker Hannifin (PH)
With annual sales of more than $11 billion, Parker Hannifin calls itself the world's leading diversified manufacturer of motion and control technologies and systems.
In layman's terms, Parker Hannifin is the world's biggest plumbing supply company. Everything that needs to flow, from liquids to gases, is fair game for Parker Hannifin's products. Its products include the pumps, valves, regulators, seals and compressors used in virtually every industry in America. Parker Hannifin has 450,000-plus customers.
The manufacturing business in the U.S. has been on the decline for quite some time, so there is little attraction for entrepreneurs to enter Parker Hannifin's territory.
At the same time, this company has had to adapt. This 100-year-old company has been through several business cycles so it has pretty much seen it all.
Parker's 450,000 customers can be found in 104 countries, so things like currency-exchange issues and shifting global manufacturing trends don't faze its managers.
Over the years, Parker Hannifin has built more than 300 manufacturing locations in 50 countries while distributing through a global network of 13,000 distributors. Parker Hannifin goes where the business is growing. When it comes to the globalization of the economy, this company stands out with boots on the ground.
Parker has increased its annual dividends paid to shareholders for 56 consecutive fiscal years, among the top five longest-running dividend-increase records in the S&P 500 index.
The current $2.52-per-share payout offers investors a safe 2.1% dividend yield. Over the last 20 years, the dividend has compounded at an 11% rate, including 18.7% per year over the past five years.
The free-cash-flow payout ratio has been trending higher in recent years and currently stands at 31%. This leaves plenty room for operations and further dividend growth, although the pace might slow from the recent torrid pace.
7. Honeywell (HON)
Honeywell is a big diversified company in manufacturing and technology. It's a complex business, but it can be divided itself into these three basic categories: Aerospace (40% of sales), Automation & Control Solutions (37%) and Performance Materials and Technologies (23%). They add up to about $38.58 billion in annual revenue.
Government aerospace contract revenue is about $3.7 billion. Export sales are 14%, while international chips in 39%. Most of it is from Europe and Asia.
Honeywell's business is capital intensive, often encountering complex government clearance and approvals before doing business. The barriers to entry are steep indeed.
There are many small players, but those with $1 billion-plus of revenue represent a classic oligopoly.
Honeywell's has built a reputation as a well-run business by earning high marks for on-time delivery.
Order backlog has been steady around $18 billion for the last several years. In a soft military spending environment, this is a positive sign.
Honeywell can be sensitive to short-term economic cycles. In 2009, during the financial crisis, the company's revenue declined 15% and earnings per share fell 45%. Even so, the company's free cash flow increased, and Honeywell even raised its dividend. The company has produced positive cash flow in each of the last dozen years, and that is why the Honeywell dividend is so safe.
The current $2.38-per-share annual payout offers a 2.4% yield. The company has been paying quarterly dividends since the 1960s. Over the last decade, dividends have compounded at a 10% annual rate. Over the past five years, they have compounded at a 12.2% annual rate.
The free-cash-flow payout ratio has been trending slightly lower in recent years to the current 36% level. Operating margins at 17.7% in 2015 were at their highest level in 10 years. This provides lots of cash flow to cushion uncertainty and suggests the company has could increase the payout ratio in the future.
8. Corning (GLW)
Today Corning is the quiet upstate New York company that makes noise as a key player in entertainment hardware and communication technology. We're talking about plumbing for Internet and display screens for the world's smartphones.
Corning's Display Technologies (39% of sales) is the largest worldwide producer of glass substrates for LCD displays. Optical Communications (30%) is the largest producer of optical fiber. Specialty Materials (11%) includes the Corning Gorilla Glass used in Smartphones. That's 80% of a $9.11 billion business.
Environment Technologies (11%) include products sold to the auto industry like catalytic converters. Finally, Life Sciences (9%) include glass beakers, test tubes etc. used in the health care field.
The company is almost as old as glass itself and traces its origins back to 1851.
The company competes on a global scale on the basis of design, product performance and availability. Price is a factor, but technological performance and availability are overriding factors.
Asahi Glass and Nippon Electric Glass are Corning's principal competitors. This market includes smartphones, computer and TV displays. Until recently smartphones have been the major growth engine for the company. While still a highly profitable business, the emphasis is shifting to fiber where high-speed internet service is today's strongest growth market.
The current 54 cent-per share annual payout offers investors a 2.4% yield. The payout ratio of 28% of EPS is in line with trends over the past five years. Corning has raised its dividend for more than five consecutive years and increased its dividend by 19.1% per year over the last five years.
The company's $7 billion of cash in the bank is enough to cover dividends for 10 years as well. Obviously that its good to have that large of a financial cushion.
The pattern of cash flow and balance sheet changes is important to take a close look. The company generates considerable cash flow and has very limited balance sheet leverage. Abundant cash flow is important to finance daily operations and to fund capital spending.
9. Smith & Nephew (SNN)
Smith & Nephew is a $4.4 billion-a-year medical device maker based in London, selling its products in more than 100 countries. According to the Medical Device Industry, Smith & Nephew ranks about 21st in the field based on revenue.
Products cover two markets. Advance Surgical Devices includes orthopedic-oriented products like joint reconstruction, repair and arthroscopic surgery devices.
The second group focuses on wound management.
No matter where is the world, there is a government agency that regulates medical devices. In the U.S. it is the division of the Food & Drug Administration set up for these items. The approval process is shorter than pharmaceuticals but otherwise just as rigorous.
Medical Devices are sold on a performance/cost basis. Price competition exists, but it typically falls down on the list of key decision issues.
Smith & Nephew is not a small fish in a big pond in spite of its 22nd ranking in the industry. According to the International Trade Commission, the market for medical devices is close to $100 billion. The business is so vast even a small niche could be worth $1 billion.
This company's biggest threat comes from Stryker, which has $9.95 billion in sales -- roughly twice those of Smith & Nephew. After that, it is Zimmer Biomet, which has $6.00 billion in annual revenue.
All three of these are beneficiaries of an aging population whose bones and joints are wearing out by the minute. The overall device market seems to grow about 3% annually and that is a premium pace these days.
The current 49 cent-per-share annualized payout offers investors a 1.7% yield. Stocks with below= average payouts sometime provide other qualities like safety or growth. Smith & Nephew offers both.
The stock has a low payout EPS payout ratio of 29.1%.
10. Applied Materials (AMAT)
Applied Materials is an important company in the semiconductor industry even though it doesn't make chips. Instead, it provides manufacturing equipment, services and software to chipmakers. It also makes equipment, software and the services that go into solar panels and related equipment.
The four main business groups are: Silicon Systems (64% of revenue), Services (26%), Display (8%) and Energy Solutions (2%). It all added up last year to $9.66 billion in revenue.
The diverse markets where Applied Materials competes are capital intensive and entering them is risky. End-product prices for computer chips and solar panels can be volatile. Thus the demand for the equipment that produces these products can change quickly.
According to the Semiconductor Industry Association, Applied Materials traditionally has ranked No. 1 in the industry with a share around 15%-17%. The 10 largest companies hold roundly 70% market share, so it is safe to categorize as intensively competitive with product innovation, timeliness of product delivery and price as the key variables to success.
SCIA forecasts the worldwide semiconductor market to increase 2.0% to $331 billion in 2017 and another 2.2% to $338 billion in 2018. This is a positive sign for equipment makers.
As the industry leader and the company that invests the most in research and product innovation, Applied usually gets the first call from customers.
One short-term issue needs attention. Samsung is the world's largest buyer of semiconductor manufacturing equipment. The current recall of the company's Note 7 phone could cause temporary disruption to historic equipment demand patterns. Applied Materials has the financial strength to deal with this type of surprise.
The current 40-cent-per share annual dividend offers investors a 1.4% yield. This is hardly an eye-popping rate. However, you may want to consider the low 23% payout ratio of EPS, which is notably low.