Written by Bob Ciura for Sure Dividend
For investors, now might be one of the most difficult investment periods since perhaps the 2007 to 2009 Great Recession as markets deal with a number of challenges.
Covid-19 continues to be a part of daily function even as the vaccine rollout continues. The Russian invasion of Ukraine has prompted selloffs in the markets as well. With many of the largest corporations in the world announcing a pausing or exiting from Russian markets as a result, this will undoubtedly impact business top- and bottom-lines. At the same time, the Federal Reserve is expected to start raising interest rates, maybe even aggressively, as it tries to get inflation under control.
In short, there is a lot of uncertainty in the market, which tends to lead to steep selloffs. For investors looking for some measure of safety, we encourage that they look for companies with business models that allow for well protected dividends.
These companies we consider to be blue-chip stocks. Three of our favorite blue-chip stocks with secure dividends include:
- CVS Health Corporation (CVS)
- Consolidated Edison Inc. (ED)
- Verizon Communications (VZ)
CVS Health Corporation (CVS)
Our first blue-chip name is CVS Health Corporation, which is an integrated healthcare service provider. The $140 billon company has annual revenue of $292 billion.
With more than 9,900 locations, CVS Health Corporation operates the largest pharmacy chain business in the U.S. This gives the company access to more potential customers than nearly all of its peers. People tend to need more prescribed medicine as they age, positioning CVS Health Corporation to take advantage of an aging population. As of the most recent quarter, the company had a 26.7% retail pharmacy market share in the U.S.
CVS Health Corporation has also moved to augment its business through acquisitions. The most important such move was purchasing insurance company Aetna in late 2018. CVS Health Corporation paid $69 billion in cash, debt, and stock for Aetna, but expanded its business to offer customers a host of healthcare options.
This includes the company’s Minute Clinics, which now total more than 1,100 inside of CVS Pharmacies and Target Corporation (TGT) stores across 33 states. The company also has 135 CVS Health Hub locations, where customers can receive a whole suite of healthcare solutions.
The addition of Aetna did mean that CVS Health Corporation would need to pause its dividend growth as the company paid down its substantial debt burden. From 2017 through 2021, shareholders received the same quarterly rate. The good news is that while growth was paused, the dividend was never in jeopardy of being cut during this period. The average payout ratio for the five-year time frame was below 30%. The company had been so aggressive in raising its dividend in the early part of the last decade that the compound annual growth rate was still above 13% even with several years of stagnant dividend payments.
The company’s dividend pause ended when it announced in early December of last year that it was raising its dividend by 10%. Leadership had guided towards a return to dividend growth as debt was reduced. CVS Health Corporation repaid almost $9 billion of debt last year, which is on top of the more than $12 billion of debt it had repaid since the close of Aetna purchase. The timing of the increase as well as the size were not yet expected.
CVS Health Corporation has a projected dividend payout ratio of just 28% for 2022 which should mean that current yield of 2.1% is well protected from being cut. The yield also compares favorably to the 1.4% average yield for the S&P 500 Index. The low payout ratio combined with the reduction of debt also means that shareholders can likely expect regular dividend growth once again.
Consolidated Edison (ED)
Our second blue-chip stock for consideration is Consolidated Edison, a holding company for Consolidated Edison Company of New York. The utility company is valued at $31.6 billion and generated revenue of close to $14 billion in 2021.
Consolidated Edison supplies electricity, natural gas, and steam to most of New York City and Westchester County. With such a large population center, Consolidated Edison has no shortage of customers. The company delivers electricity to 3.7 million customers and gas to 1.2 million customers.
Consolidated Edison is primarily a regulated utility, meaning that the company is at the mercy of regulators to earn return on its investment. The company is currently in the stages of preparing for a rate review for New York, its largest business, later this year that will go a long way in determining what potential earnings growth will be for the next few years. Leadership has stated that the goal is to grow earnings-per-share by 5% to 7% through the middle of this decade.
As a regulated utility, Consolidated Edison has enjoyed relatively stable revenue and earnings growth over the years. This has paved the way for a growing dividend as the company has raised its dividend for 48 consecutive years. This is one of the longest dividend growth streaks among companies in the utility sector and places Consolidated Edison two years away from achieving Dividend King status.
We forecast that Consolidated Edison will have a dividend payout ratio of 70%. A high payout ratio is quite common among utility companies, so this projected level isn’t highly concerning to us. The company has a five-year average payout ratio of 69%, so our expectation for 2022 is very close to the medium-term average.
Dividend growth has been slow over the years at less than 3% annually due to a high payout ratio and low earnings growth. The tradeoff is that Consolidated Edison offers a yield of 3.5%, more than 200 basis points higher than the average yield of the market index.
Our last blue-chip name to discuss is Verizon, a leading wireless carrier in the U.S. The $221 billion company has annual revenue approaching $134 billion.
Verizon has amassed a network that covers almost the entirety of the nation. More than 98% of the country and close to 300 million people are covered by the company’s network. This gives Verizon a vast pool of potential customers. Currently, the company provides service to more than 98 million customers.
The industry has seen consolidation in recent years to the point that there are now just three main wireless providers. This puts a limit on competition, helping to maintain pricing. Fewer competitors mean less of a chance of a price war between the wireless companies in an effort to attract customers. This allows Verizon to see a benefit of its size and scale in its business. The company’s service is highly effective at retaining customers as the churn rate is often below 1%.
Verizon is also in the midst of the rollout of 5G, which is one of the most important events in the industry in years. Service has already been turned on in many major markets, with the service scheduled to come to more areas in the near-term. Verizon was the first of the major carriers to activate its 5G network, giving the company a first mover advantage.
The service has clearly resonated with consumers as the company added close to 1.1 million wireless retail postpaid net adds in the most recent quarter. Just over a third of total consumer wireless phone customers have 5G capable devices. Verizon should see tailwinds as the majority of its customer base has yet to upgrade to devices capable of accessing the service.
As a result, Verizon should continue to grow its dividend, which it has done for 17 consecutive years. Growth has been slow and steady over the long-term, with the dividend growing at just 2.5% since 2012. Helping to offset this low growth is a 4.9% dividend yield and a projected payout ratio of just 47% for the year. Between business results and a low payout ratio, Verizon’s high yield looks to be extremely safe.
Markets have multiple headwinds at the moment, which has resulted in uncertainty and swings in price levels. For investors who want stability in an otherwise unstable time, we suggest they focus on high quality dividend paying blue-chip stocks.
CVS Health Corporation, Consolidated Edison, and Verizon are three stocks that we feel fit the description of a blue-chip stock. Each company has a successful business model that has allowed for dividend growth.
Even CVS Health Corporation, which paused its dividend for several years, has a dividend CAGR in the low double-digit range as it has a history of aggressively raising its payments to shareholders. Consolidated Edison and Verizon both have long track records of dividend growth, especially the former, which is nearing the 50-year mark.
For investors looking for some stability, CVS Health Corporation, Consolidated Edison, and Verizon could be excellent options as each pays a very secure dividend.