3 Cash-Is-King Dividend Stocks

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Apart from bankruptcy, nothing has the ability to hammer dividend stocks like a dividend cut or suspension. Indeed, the entire point of investing in dividend stocks is to find companies that pay reliable and rising dividends over long periods of time.

Revenue can ebb and flow, earnings can come and go, but as long as dividend stocks are buttressed by a gusher of levered free cash flow, there’s little reason to worry that the dividend spigot will be turned off.

Levered free cash flow (LFCF) is too often overlooked as a measure of health in dividend stocks, but it’s arguably the most important factor in determining whether a company will keep up its payouts. After all, levered free cash flow is what’s left after a company pays interest on debts, dividend, capital expenditures, you name it.

LFCF is also a good yardstick for finding cheap stocks. Price-to-earnings (P/E) is more popular, sure, but price-to-levered free cash (P/LFCF) flow can be a better metric. Dividend stocks can dive if a company posts a net loss, screwing up the P/E, but if the company has billions in cash sloshing around, that dividend (now with a higher yield) is abundantly safe.

We decided to scour the market for cheap, high-dividend stocks generating unusually high levered free cash. These dividend stocks had to be in the Russell 1000, have a yield of at least 5% and a P/LFCF multiple of less than 15.

Based on those criteria, here are three great dividend stocks where cash is king, as they have big piles of cash leftover after paying interest and everything else you can think of:

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Mack-Cali Realty (CLI)

CLI Price/LFCF: 6.5
CLI Dividend Yield: 5.5%

Real estate investment trusts are dividend stocks that tend to have firehoses of levered free cash. That’s because once a month, every month, the rent checks and get paid and those payments pile up.

A number of REITs look like big-cash dividend stocks, but Mack-Cali Realty (CLI) stands out because of its superior dividend yield relative to its cash flow. CLI pays a dividend yielding 5.5% even as its valuation of price-to-levered free cash flow is in the single digits.

The brutal cold winter in the Northeast hurt Mack-Cali’s results, as expenses piled up for maintaining its portfolio of apartments. Shares in CLI are up just 1% so far this year to lag the broader market.

But that dividend probably couldn’t be safer thanks to the levered free cash CLI generates. During the past 12 months, CLI pumped out nearly a quarter of a billion dollars in free cash — after paying interest expense, capex and $135 million in dividends, according to S&P Capital IQ. With more than twice as much free cash as dividend payments, CLI is not only safe, but looks undervalued too.

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AT&T (T)

T Price/LFCF: 12.7
T Dividend Yield: 5.2%

Telecommunications stocks generate tremendous cash flow because (most) people pay their phone bills every month. Indeed, the deal in so much cash that there’s still plenty leftover even after gargantuan expenses to build and maintain networks.

With a yield of 5.2%, AT&T (T) is routinely one of the top 10 dividend stocks is in the S&P 500, but given how much free cash the telco generates, it could probably be No. 1 if it wanted to. T had $22 billion in capex over the last 12 months, it paid more than $9 billion to pay off debt and shelled out nearly $10 billion in dividends. Interesting,

And yet, after all that, T still generated more than $14 billion in levered free cash flow in the past year. Not only can investors can feel comfortable with T’s ability to swallow DirecTV (DTV), but the numbers also suggest that T can easily juice its dividend.

T shares are breakeven so far in 2014, but look like they could rise on multiple expansion given that the P/LFCF and P/E both look cheap at about 12. No, slow growth means AT&T won’t get a really big multiple, but the cash flow suggests solid future earnings growth and higher dividends too, and that should buoy T stock.

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R.R. Donnelley (RRD)

RRD Price/LFCF: 9.4
RRD Dividend Yield: 6.7%

It’s hard to find a more boring company than R.R. Donnelley (RRD). It both prints and creates custom content (e.g., annual reports) for private and public companies.

In other words, RRD could be thought of as a hot tech stock … if we were still in the Middle Ages.

So it’s somewhat of a surprise that RRD also prints cash. Levered free cash flow came to more than a half-billion dollars over the trailing 12 months. Furthermore, because RRD has comparatively few shares outstanding, it only paid $189 million in dividends last year — even with a whopping yield of 6.7%.

R.R. Donnelley also looks extremely cheap. RRD trades at a little more than 9 P/LFCF. The forward P/E is likewise 9. That’s a discount of more than 40% compared to the broader market.  And RRD has a growth trajectory that lags the S&P 500 by only about a percentage point.

Of course part of the reason for the high dividend is a slumping share price. (That’s always something to consider when hunting for dividend stocks.) After a stunning rise in 2013, RRD has lost 23% so far this year, wiping out any gains from the dividend. That’s partly due to weak top-line growth. But the levered free cash flow multiple suggests that shares are beaten down more than enough.

Furthermore, RRD’s strategy hangs on making acquisitions and it certainly generates enough free cash to keep doing deals.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.