S&P has reported that the dividends of companies in its S&P 500 index are being cut at the fastest rate in fifty years. A report by the Associated Press says that even Dow Chemical (DOW), which has not dropped its dividend since 1912, may need to reduce its payout.

A large number of investors purchased stocks for their yields. People on fixed incomes often use dividend payments to cover basic living expenses. Other investors look at companies paying dividends as "safe havens". Their share prices may go down, but at least holders get a quarterly check. It is a good system until the firms with impressive yields become concerned that they are running low on cash.

24/7 Wall St. examined each company’s sales, operating margins, cash and cash equivalents, long-term debt, receivables and payables, and its overall long-term health and the viability of the markets it does business in, to determine each firm’s ability to pay dividends..

There are a small number of large companies which are likely to keep their dividends at current levels even through a deep recession. These companies have tremendous amounts of cash on their balance sheets, little or no debt, and are in businesses which are almost certain to have strong margins even in tough economic periods.

Here are ten companies which should be at the top of any list of safe dividends:

Halliburton (HAL) supplies services to the oil industry. That would seem, at first, to be a bad business to be in as crude prices fall. Fortunately for the company, while oil exploration has dropped quite a bit in North America, it is still a healthy business in part of the Middle East, South America, and a number of areas offshore where fields used to be too deep to reach. In the fourth quarter, HAL had operating income of $776 million on revenue of $4.9 billion. Management has said the 2009 sales will be a little soft, but not catastrophic. Halliburton has cash and receivables of almost $5 billion and payables and debt of $3.4 billion. The firm’s dividend is $.36 which is a yield of 2.11%. Not a big return, but completely safe.

Johnson & Johnson (JNJ) had revenue of $63.7 billion last year. It made a net profit of $13 billion which was up 22% from 2007.Very few large operations have that level of net margin. The company has three main businesses: consumer, which sells soaps and toiletries, pharmaceuticals, and medical devices. While drug sales were off a bit last year, the other two lines of business improved. JNJ expects EPS this year to be about the same as last. The most recent balance sheet filed with the SEC shows JNJ with long-term debt of under $8.4 billion and cash and marketable securities of almost $15 billion. The company has a $1.80 dividend and 3.2% yield. Its payout is safe.

PepsiCo (PEP) pays out $1.70 which is a yield of 3.4%. There are a number of reasons that the dividend is safe. The most important may be that people will buy cheap soft drinks in almost any economy, whether it is good for their health or not. In its last reported quarter, Pepsi made $1.5 billion on sales of $11.2 billion. The firm’s annual operating income of about $6 billion is almost equal to its long-term debt of $6.5 billion.

AT&T (T) sells phones and telecom services. This is a sector that will always be with us. AT&T is now into the business of delivering video to people’s homes and data to their cellphones. Both are likely to grow for years. In the final quarter of 2008, AT&T had net income of $2.4 billion on revenue of $31.1 billion. The company has free cash flow of $5.4 billion for the quarter and $13.3 billion for the year. For 2008, dividends paid totaled $9.5 billion, shares repurchased totaled 164.2 million for $6.1 billion. Put another way, AT&T is rolling in money. Investors can take the $1.64 dividend and 6.5% yield to the bank.

Microsoft (MSFT) may not be the fast-growing company it was a decade ago, but its core software operations still have margins of over 70%. In the last quarter, Microsoft had operating income of almost $6 billion on revenue of $16.6 billion. The firm has almost $21 billion in cash and investments. It has no debt. Microsoft’s dividend is $.52 and its yield is 2.9%.

McDonald’s (MCD) has a business which is often described as recession-proof. Its dividend is as well. Last year, McDonald’s comparable store sales rose almost 7%. When it reported its annual earnings it said it had returned "$5.8 billion to shareholders through shares repurchased and dividends paid, including a 33% increase in the quarterly cash dividend to $0.50 per share for the fourth quarter – bringing our current annual dividend rate to $2.00 per share." The company had revenue of $23.5 billion and net income of $4.3 billion. If anything, the shareholder return from MCD could go up this year.

Costco (NASDAQ:COST) is in the top tier of an awful industry. Retailing is falling apart, but a few firms like Wal-Mart are doing fairly well. Costco has a $.64 dividend and $1.4% yield. In the company’s last reported quarter, which ended on November 23, Costco’s sales were $16 billion, up 4% compared to the same quarter a year ago. Net income was $263 million. More recently, COST said its future sales would be soft and shareholders sold off the shares  But,Costco announced its quarterly dividend of $.16. The company has long-term debt of $2.2 billion and cash of $2.2 billion. It will have a hard year, but the payout will be OK.

Disney (DIS) has a $.35 dividend and modest 1.6% yield. Some of the company’s units have begun to suffer during the downturn, especially its theme parks, movie studios and TV networks. In the last quarter, net income fell to $845 million, or $.45, from $1.25 billion, or $.63, a year earlier. Disney has over $11 billion in long-term debt and $3 billion in cash. That ratio is not as favorable as for some other companies on the list, but its free cash flow gives Disney a large buffer even if some of its division are being hurt by the economy.

Comcast (CMCSA) has a good reason keep paying its dividend. Its founding family runs the company and still owns a large piece of the firm. Comcast pays a $.25 dividend for a 1.7% yield. The fortunes of the cable firm may be helped by the government’s new stimulus package. Part of the current plan to improve broadband infrastructure is to give tax incentives to the companies that build out the new systems. According to BusinessWeek, "those most likely to benefit would be existing broadband providers such as AT&T (T), Verizon Communications (VZ), and Comcast (CMCSA), because they have the capital to make investments, and it costs less to extend their networks than it does to build new ones." Comcast hardly needs the help. In its last reported quarter, Comcast had revenue of $8.5 billion, up 10% from the same quarter the year before. Operating income was up 20% to $1.7 billion and free cash flow rose 77% to $928 million. Comcast’s digital video, VoIP, and broadband operations continue to do well. Comcast has cash to spare. It bought back $2.8 billion in shares in the three quarters ending in September, and paid out over $500 million in dividends over the same period.

Procter & Gamble (PG) Even in rough economic periods, people buy razors and laundry detergent. When P&G announced full-year earnings it said its growth would slow this year. But, unlike many other big companies, it is still growing. In the final quarter of last year, revenue was down slightly to $20.4 billion. Earnings were up 53% to $5 billion, but that included $2 billion that P&G got from the sale of Folgers. For the current quarter, P&G sales revenue could move up 2% to 5%. P&G confirmed that it was comfortable with the Wall St consensus earnings forecast for the period. P&G’s cash position is $5 billion and long-term debt is almost $20 billion which should not be troubling given the company’s earnings power. P&G’s $1.60 dividend is safe. At its current share price, it has a yield of 3%.

Douglas A. McIntyre

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