Safest Income Stocks for 2013 (Part II)

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the previous article discussing the safest income stocks for the new year, I have outlined two stocks with potentially sustainable dividends, Coca-Cola and Philip Morris. The important thing for investors is to learn two rules that Warren Buffett mentioned over and over again: “Rule 1: Never lose money, and Rule 2: Never forget Rule #1.” In this article, I will unveil two more dividend stocks, which will let investors sleep well at night. These two businesses have established their strong global franchises with significant global market share.

International Business Machines (NYSE: IBM) is the largest global integrated information technology provider operating in more than 170 countries. The majority of its revenue derived from Global Technology Services, nearly $40.88 billion, represents 38.5% of total revenue. The second biggest revenue source was the Software segment, nearly $25 billion accounting for 23.4% of the total 2011 revenue. The company’s growth initiatives include Smarter Planet, Business Analytics and Optimization, Growth Markets, and Cloud Computing. In the last 10 years, IBM has been consistent in delivering increasing revenue, EPS, and dividend payments. Since 2002, revenue has grown from $81.19 billion to $106.9 billion in 2011. In the same period, its EPS has increased more than sixfold, from $2.06 to $13.06, and the dividend payment has gone up from $0.59 per share up to $2.90 per share. Even with the increase in dividends, IBM has maintained a conservative payout ratio, which has been in the range of 20.9% to 23% in the last 5 years.

Interestingly, even Warren Buffett said that he didn’t like to invest in technology, as he didn’t understand it. IBM is one of his biggest stock investments ever. Via Berkshire Hathaway, Warren Buffett owns more than 67.5 million shares of IBM, with the total value of more than $12.9 billion. He said: “They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015. They've done an incredible job."  IBM is trading at $191.24 per share, with the total market capitalization of $216.11 billion. IBM is valued at quite reasonable valuation, of 13.8x trailing P/E. The current dividend yield is 1.7%.

McDonald’s Corporation (NYSE: MCD) also makes my list of safe income stocks for 2013. It is the world’s leading franchise food service restaurant chain with more than 34,000 restaurants globally in 119 countries. In 2011, it had 6,435 company-operated restaurants, representing around 19.2% total restaurant count. The rest of the 27,075 restaurants were franchised. A month ago, McDonald’s reported a global 1.8% decrease in October comparable sales, a first comparable sales decline in a decade. The decline in October comp sales was due to the weak global economy, along with intense competition from other quick service restaurant chain rivals, including Yum! Brands (NYSE: YUM) and Wendy’s (NASDAQ: WEN). However, the refocus on the value-price menu has helped McDonald’s post comp sales growth again in November.

In the last 10 years, McDonald’s EPS has been on an upward trend, from $0.70 in 2002 to $5.27 in 2011. It has also paid increasing dividends over time, from $0.24 per share to $2.53 per share in the same period. It is currently trading at $88.54 per share, with a total market capitalization of $88.89 billion. The market is valuing McDonald’s at 16.8x trailing P/E, with a 3.2% dividend yield. McDonald’s is relatively cheap compared to its other peers. YUM is valued at a higher earnings valuation, of 19.2, whereas its paying a lower 1.8% dividend yield. Wendy’s is currently generating losses, and its dividend yield is 2.1%.

Foolish Bottom Line

Both of these companies are safe bets with their global franchises and wide economic moats. With increasing dividend payments over time, both IBM and McDonald’s could fit well in the income portfolios of patient investors in 2013.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and McDonald's. Motley Fool newsletter services recommend International Business Machines and McDonald's. 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 disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus