Yesterday I wrote a post on stocks with high and rising dividends, but the emphasis was mostly on high dividends. Today I want to change the parameters a bit to focus more on rising dividends. Some of the same companies show up on both lists.
I don’t know if this is the bottom of the market yet; there are lots of big macroeconomic headwinds. I do know that fixed income is not a good place to find a decent income these days.
While I don’t see inflation as being a major problem today — or in the near to intermediate-term future — I would not rule out significantly higher inflation a few years down the road. T-notes anywhere on the yield curve do not offer any protection from that happening. Dividend-paying stocks do.
Stock Dividends Yielding Higher than T-Notes
There are a total of 115 stocks in the S&P 500 that do not pay a dividend. However, based on the T-note yields as of mid-day today, and the dividend yields as of last night’s close (given the sell-off today, the actual dividend yields will be higher), that 328, or 85.2% of the S&P 500 stocks that do pay dividends have yields greater than that of the 5-year note (0.86%), 203 or 53.7% of the dividend payers yield more than the 10-year (2.11%) and 87 (22.5%) yield more than the 30-year long bond (3.50%).
The reason you buy stocks is that they represent partial interest in a company. You want to own companies, because over time they make a lot of money, and they can then pay that money out to you in the form of dividends. Even with stocks that currently don’t pay a dividend, the idea is that they will be able to redeploy the cash they earn better than you could, so that they continue to grow their earnings and thus sometime down the road can pay out even bigger dividends.
With interest rates at rock bottom levels, income is very hard to find. Dividend paying stocks are a great place to look for it. The sell off has pushed up dividend yields. Strong companies have a tendency to increase those dividends over time. This will raise your yield on cost.
For example, if a company has been increasing its dividend at 15% per year (and should be able to continue to do so), and it was initially yielding 2%, it means that after five years, you are actually holding a security that is paying you 4% based on your original cost. If you don’t need the income now, those dividends can be reinvested, and the power of compound interest results in even higher eventual income down the road when you do need the income. If you buy a T-note yielding 2.1%, after five years, it is still going to be yielding 2.1% on your original cost.
Now suppose that the market sell-off has pushed that yield up to 3% today. Well, if the company continues to raise its dividend at 15%, then five years from now you are getting 6% on your original cost. If you reinvest the dividends, the compounding effect is even greater. It is unlikely that the stock will actually be yielding 6% five years from today. Instead, the price of the stock will rise, but that will not change your yield on cost.
Screening for a Strong List
To help identify some potentially great long-term bargains, I ran a screen. First I eliminated all the firms that have either a Zacks #5 Rank (Strong Sell) or Zacks #4 Rank (Sell). The Zacks Rank is an unparalleled short-term tool for traders. Even if a stock looks like a bargain today, you would be better advised to wait a month or two to buy it if it has a bad Zacks Rank. If you are a short-term trader, a good Zacks Rank (ideally a number #1, but a #2 is OK) should be absolutely the first thing you look for.
However, if you are planning to hold on to the stock for five or 10 years, it is best used just to avoid potential land mines. It is no fun buying a stock based on getting 3.5% a year in dividends if over the next week it falls by 10%.
The next thing I did was only look at companies over $2 billion in market cap. In turbulent times, small caps are often much more volatile than large caps. There are small caps out there that would fit the bill, but I wanted a more manageable list, and I want stable companies that will be around for a long time. Large caps tend to be less dependent on a few customers or a specific geographical area.
I then looked for all the companies that are yielding more than 2.11% today (the yield on the 10-year). Since the last thing you want to see is a dividend cut if you are buying a stock for its yield, I looked for two lines of defense.
Payout Ratio
The first is the payout ratio. A company cannot pay out everything it earns and still be able to grow for very long. If it pays out more than it earns, then it has to borrow to do so, and eventually that will catch up to it. If it is paying out significantly less than it earns, the board of directors will generally feel much more confident about raising the dividend.
I put in a very stringent requirement of a payout ratio of less than 50%. In other words, these companies could see their earnings cut in half and still be able to pay the existing dividend without taking on debt to do so.
Dividend Growth History
Also, the first cut is the hardest for a company to make. I thus required that the company have grown its dividend by at least 10% a year over the last five years. That period has included the worst economic downturn since the Great Depression. If companies didn’t cut during the 2008-’09 downturn, they are not likely to do so now.
Another way of looking at it is that if a company has a 2.1% yield today and raises its dividend at 10% per year for five years, and the stock still yields 2.1% five years from now, then your total return will be 12.1%. In the current environment, that would be a very acceptable rate of return.
Inexpensive P/E Ratios
Finally, since dividends are paid out of earnings, I wanted the companies to be cheap on that basis as well, so only the companies that are trading for single digit P/E’s based on 2012 earnings are included. To the extent that earnings are higher in 2012 than they have been over the last 12 months, the payout ratios will be even lower than they are now, unless of course the companies raise their dividends. I also wanted to cut down the list to a manageable size.
From the list below you could create a very well diversified portfolio by both industry and geography. Stocks with nice dividend yields and rising dividend yields are not limited to these shores.
What the Screen Came Up With
Since I think the long-term direction of the dollar is lower (and I hope it is since that is the only way we will get the trade deficit, which is sucking the economic life out of the country, under control), what companies earn overseas is going to be more valuable than what they earn here as those earnings are translated back into dollars. Of course, many U.S. companies earn a very large part of their earnings from abroad as well.
Oil companies are common on the list. While oil prices have declined sharply in recent weeks, just as they did in the fall of 2008, I doubt that they are going to stay down for the long haul. Oil is simply very hard to find — especially in places that are politically safe — and demand continues to grow as the new middle class of places like China and India buy their first cars.
It is not an economic constraint on the world in increasing production. Oil prices are up more than ten-fold from the late 1990’s and production has barely budged. The geological constraints are real. The value of existing reserves of oil should rise over time, and with it, the earnings and the dividends of the big oil companies.
Companies like Total (TOT) and ConocoPhillips (COP) are not going to go out of business anytime soon, and absent a BP-style disaster, it is highly unlikely that they would cut their dividends.
However, you don’t have to put all of your money into the oil patch to get high and rising dividends. Two pillars of the tech world — Intel (INTC) and Microsoft (MSFT) — are also on the list. Both are sitting on huge piles of cash and have not only been raising their dividends, they have also been buying back their stock, which economically is very similar to paying a dividend.
There are also very solid choices available in the major drug companies and medical device firms. Just because the market is down doesn’t mean people are not getting older and won’t need more drugs and devices in the future.
One U.S.-based company on the list actually gets most of its profits from Japan. Aflac (AFL) has a brand and distribution system over there for supplemental health insurance that would be almost impossible to replicate. It has a history of raising its dividend that goes back much further than five years.
With a payout ratio of just 20% they have lots of room to raise the dividend even if earnings don’t rise. If Aflac keeps up their historic dividend raising pace, then in five years it will give you a yield on cost of 5.76%, and in ten years 11.52%. That sort of income you could retire on.
Caveats on the Overall Market
Is the current downturn in the market over? Honestly, I don’t know. There are some very good reasons for the downturn. While corporations are in great shape, the economy is not. The government is not in a good position to help get it going again, especially after the recent debt ceiling agreement essentially took away the possibility of using fiscal stimulus to get unemployment down and economic growth up.
It is very brittle to any external shock, and the shocks coming out of Europe — with the potential breakdown of the single currency itself — are big ones. Still, the U.S. has been through worse, and has always come out the other side.
These are the sorts of times that are the best friend to the long-term investor. Don’t try to be a hero in here and shoot for the most aggressive names. But don’t hide in a hole and curl up in the fetal position. Start buying good solid companies paying attractive, safe and preferably growing dividends. Five years from now you will be very glad that you did.
| Company | Ticker | Div Yield | Payout Ratio | Zacks Rank | Div 5-Yr Growth | P/E Using Next FY Est | Market Cap |
| Rwe Ag -Sp Adr | RWEOY | 7.98% | 0.37 | 2 | 12.26% | 5.49 | $24,495 |
| Total Fina Sa | TOT | 5.41% | 0.39 | 3 | 12.15% | 5.92 | $115,978 |
| Alliance Res | ARLP | 5.32% | 0.49 | 3 | 13.45% | 8.11 | $2,550 |
| Repsol Sa-Adr | REPYY | 4.26% | 0.39 | 3 | 26.49% | 6.89 | $33,647 |
| Ecopetrol- Adr | EC | 4.17% | 0.39 | 3 | 29.84% | 9.52 | $82,766 |
| Raytheon Co | RTN | 4.16% | 0.32 | 3 | 11.77% | 7.41 | $14,710 |
| Lockheed Martin | LMT | 4.12% | 0.4 | 3 | 21.53% | 8.25 | $25,452 |
| Intel Corp | INTC | 4.04% | 0.32 | 3 | 12.18% | 8.4 | $110,229 |
| Conocophillips | COP | 3.90% | 0.37 | 3 | 11.27% | 7.5 | $95,765 |
| Astrazeneca Plc | AZN | 3.85% | 0.42 | 3 | 12.07% | 7.18 | $62,265 |
| Novartis Ag-Adr | NVS | 3.50% | 0.37 | 3 | 21.50% | 9.9 | $131,102 |
| Greif Bros-Cl A | GEF | 3.13% | 0.35 | 3 | 21.23% | 9.98 | $2,532 |
| Ensco Plc | ESV | 3.07% | 0.45 | 3 | 68.12% | 7.6 | $6,538 |
| Safeway Inc | SWY | 3.07% | 0.35 | 3 | 20.44% | 9.99 | $6,700 |
| Lukoil Hldg-Adr | LUKOY | 2.94% | 0.06 | 1 | 19.41% | 4.47 | $51,629 |
| Genl Dynamics | GD | 2.92% | 0.27 | 3 | 15.09% | 8.37 | $23,972 |
| Medtronic | MDT | 2.91% | 0.27 | 3 | 20.36% | 8.78 | $35,340 |
| Aflac Inc | AFL | 2.88% | 0.2 | 3 | 15.04% | 6.4 | $19,513 |
| Kla-Tencor Corp | KLAC | 2.76% | 0.2 | 3 | 15.17% | 8.7 | $6,078 |
| Ahold N V Adr | AHONY | 2.75% | 0.24 | 3 | 15.89% | 8.8 | $14,299 |
| Harris Corp | HRS | 2.67% | 0.21 | 3 | 21.52% | 6.75 | $4,771 |
| L-3 Comm Hldgs | LLL | 2.57% | 0.21 | 3 | 18.54% | 7.75 | $7,422 |
| Copa Hldgs Sa-A | CPA | 2.56% | 0.26 | 1 | 48.43% | 9.21 | $2,816 |
| Invesco Ltd | IVZ | 2.51% | 0.29 | 3 | 10.42% | 9.19 | $9,038 |
| Microsoft Corp | MSFT | 2.49% | 0.24 | 3 | 11.53% | 8.01 | $216,553 |
| Everest Re Ltd | RE | 2.46% | 0.49 | 3 | 12.15% | 6.72 | $4,240 |
| Best Buy | BBY | 2.35% | 0.17 | 3 | 11.02% | 6.86 | $9,542 |
| Guess Inc | GES | 2.34% | 0.26 | 3 | 34.51% | 8.55 | $3,162 |
| Deere & Co | DE | 2.26% | 0.24 | 2 | 11.02% | 9.68 | $30,496 |
| Parker Hannifin | PH | 2.19% | 0.23 | 3 | 14.26% | 8.31 | $10,963 |
| Credicorp Ltd | BAP | 2.18% | 0.22 | 3 | 10.61% | 9.16 | $7,127 |
| Assurant Inc | AIZ | 2.13% | 0.16 | 3 | 11.85% | 6.1 | $3,264 |
| Occidental Pet | OXY | 2.11% | 0.25 | 3 | 16.63% | 9.09 | $70,997 |
AFLAC INC (AFL): Free Stock Analysis Report
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