Briggs & Stratton isn't in a sexy business. It's the world's largest maker of air-cooled gasoline engines of the kind that are found in lawn mowers and snowblowers. Because of the weak U.S. economy and depressed housing market, shares of Briggs & Stratton (BGG) lost 60% of their value in the past three years through December 5.
Over the same period, however, the company's 88-cents-a-share dividend has remained unchanged. As a result, Briggs's stock yielded a mouthwatering 5.5% in early December. That's nearly twice the yield of the overall stock market and more than double the current return of ten-year Treasury notes.
Thanks to the brutal bear market, Briggs is hardly alone in the high-yield club. As of December 5, according to Yahoo, 234 U.S.-traded stocks with market values of $1 billion or more yielded 6.0% or better (Briggs's market capitalization is $790 million).
The list is filled with financial stocks, foreign companies, energy royalty trusts and unusual real estate investment trusts (REITs). Some of the yields are astounding: Duke Realty (MDRE), 24.5%; Gannett (GCI), 17.9%; Hartford Financial Services (HIG), 8.8%; Seagate Technology (STX), 10.6%; and Harley-Davidson (HOG), 8.0%. But yields that high are often too good to last.
The lure of a huge dividend payout is hard to resist. If you buy Briggs stock at $16 (its closing price on December 5) and it climbs a mere buck over the course of a year, you'll earn roughly 12%. If the stock simply stands still, you'll at least capture the attractive yield.
Hardly a layup. But buying high-yield stocks is hardly risk-free, especially with the economy in the midst of what is shaping up to be a severe recession. At issue is whether companies will have to pare dividends to conserve cash. In 2008 through December 3, 57 of the companies in Standard & Poor's 500-stock index, including Citigroup and General Motors, had cut or suspended their dividends.
To determine the sustainability of a payout, it's useful to compare the dividend with the company's cash flow -- the amount of cash a company actually generates from its operations. You calculate cash flow by adding depreciation and other noncash charges to a company's after-tax profits. Out of cash flow comes the money to pay for capital expenditures, repay debt, buy back shares and pay dividends.
For example, when Briggs & Stratton upped its dividend to 88 cents a share in 2006, it was generating much more cash flow per share than it is now. But even the reduced amount of cash that Briggs generated in the fiscal year that ended last June -- $1.35 per share, according to Value Line -- was easily enough to cover its dividend. Value Line expects Briggs's cash flow to rise to $2.30 per share in the current fiscal year. Analysts who follow Briggs -- and the company itself -- say the dividend is safe.
But even a rock-solid financial position may not guarantee dividend security. Companies may cut or eliminate a dividend to preserve cash while weathering the storm or to build up a reserve for acquisitions. To guard against getting blindsided, look for com-panies with long histories of preserving (or better yet, increasing) their dividends.
Finally, tread gingerly with high-yielding financial companies, especially those receiving aid from the federal government's rescue program. You can bet they won't be increasing dividends anytime soon, and they may be under pressure to cut dividends as the price for benefiting from Uncle Sam's largess. In addition to Briggs & Stratton, here are four attractive, high-yielding companies -- none of them REITs, trusts or partnerships -- whose dividends appear to be secure.
GENERAL ELECTRIC (GE)
It seems inconceivable that the giant conglomerate, which has raised its dividend 32 years in a row, would cut the payout. True, GE derived some 45% of its profits from financial serv-ices in 2007. But barring an economic collapse, cash flow should remain well above the $1.24-per-share annual payout. At GE's December 5 close of $18, the stock yields 6.9%.
Alcohol sells in just about any economy, so profits and sales for the London-based liquor, wine and beer company should continue their ascent in the year ahead. Diageo is well entrenched in the U.S., the world's most profitable liquor market, with products such as Johnnie Walker scotch whiskies, Captain Morgan rum and Jose Cuervo tequila. Diageo's American depositary receipts, at $54, yield 5.8%.
Most retailers may have gotten a lump of coal rather than profits during the holiday season, but this toy maker should have rung up a merry 2008. The company is banking on tried-and-true toys, such as Elmo and Barbie, to keep the cash and dividends flowing. Mattel shares have dropped 49%, to $15, since April 2007. They yield 5.1%. And the company's earnings recently received a boost when a federal judge ruled that MGA Entertainment must stop making its pouty-lipped Bratz dolls, sales of which were eating into Barbie's share of the doll market.
MICROCHIP TECHNOLOGY (MCHP)
It's rare to find high yielders among high-tech stocks, but that's what you get with Microchip. At $18, down from $42 in June 2007, the shares yield a tempting 7.6%. Microchip makes "computers on a chip," which are found in everything from toys to remote controls to car parts. The company paid its first dividend -- 2 cents a share -- in 2002. It's now paying at a rate of $1.36 per share.