I was listening to a business talk show in my car the other
day. The show's host made an important point.
"Stop talking about thedividend trade," he implored. And he's
The "dividend trade" has become shorthand for the mania for
dividend-payingstocks . It's been a key theme in the currentbull
market , though the phrase implies that it's a passing trend.
And while he may be right that all the chatter has gotten a
little out of hand, anyone who would dismiss the move toward
dividend-paying stocks as simply a fad is just wrong.
It's not just the flavor of the week -- as we've said before,
we think we're in the beginning phases of a Dividend Decade -- a
trend thatwill be around for years to come.
That's because companies increasingly understand the
importance of rising dividend payouts. Many firms that used to
pay little attention to their dividends have realized in recent
years that it's wiser to returncash to shareholders than to spend
it on acquisitions that may or may not pay off. That's especially
true when considering that corporate America is sitting on a $1.7
trillion pile of cash. In fact, we're so convinced that a large
amount of this will go toward dividends that we're calling it the
For investors, the key is to find companies that have shown a
clear willingness to hike their dividends -- and have the
financial firepower to continue doing so.
I took a look at the 1,500 companies in the S&P 400, 500
and 600, focusing on those firms that alreadyoffer adividend
yield of at least 2%. I then narrowed the list to firms that have
boosted their dividends at an annualized pace of at least 10%
over the past three years. Lastly, I narrowed the list further to
focus on companies that have apayout ratio of less than 40%.
Any company with such a low payout ratio has the wiggle room
to hike the divided by boosting the payout ratio toward the 50%
mark. There are 63 companies in those three S&P indexes that
have the dividend yields, dividend growth rates and payout ratios
we're looking for. Let's look at the group in various ways.
First, let's look at the highest yielding stocks that have a
strong dividend growth record and sub-40% payout ratios.
Thanks to the recent plunge incommodity prices, mining stocks
have taken a tumble, pushing up their dividend yields in the
process. That's why
Newmont Mining (
head up the list here. Both of these firms have tended toward
sizable dividend hikes in recent years, but the commodity
sector's troubles compel you to listen to their first-quarter
conference calls to hear the management discussion about dividend
growth plans. The still-low payout ratios, especially at Newmont,
may enable them to keep hiking their dividends, even ascash flow
growth slows in the near term.
Mattel's Rising Payout
Toy and games maker
is the perfect example of a company poised for continued dividend
growth. In the past, management sought to boost the business
through acquisitions, but internal growth has become the
priority. Because cash is no longer needed for acquisitions,
dividend hikes have become the norm.
Now let's look at these stocks from a different angle,
focusing on robust dividend growth rates.
Solid Dividend Growth
It's clearly impossible to keep boosting the annual dividend
by 50% or more, but for these companies, especially the ones that
have payout ratios below 35%, respectable double-digit dividend
boosts could remain the norm for the next several years.
Handbag and accessories maker
is a perfect example. Founded in 1941, the company paid its first
dividend, a paltry 9 cents a share, in 2009. Since then, the
divided has been rising roughly 30 cents peryear . If the trend
holds into 2014, Coach will be paying an annual dividend of $1.50
a share. Frankly, dividend hikes could continue well into the
future, considering the still-low payout ratio.
Let's now look at companies with the lowest payout ratios
(keeping those other two variables constant).
Low Payout Ratios
Some of these firms will likely never be able to boost their
dividends enough to reach a 40% or 50% payout ratio.
, for example, carries a considerable amount ofdebt and faces
serious long-term cash flow pressures, as I've noted before.
And banks such as
JPMorgan Chase (JPM)
need to retain the bulk of their cash flow to satisfycapital
requirements. Still, it's clear that a few of these companies may
be on the cusp of sustained double-digit dividend hikes.
For instance, expect rising dividends from
. The retailer recently said its capital spending needs of $200
million per year will be less than annualfree cash flow , which
makes the current $425 million cash balance appear excessive.
Management plans to spend at least $100 million of that cash on
further dividend hikes and possibly share buybacks, andanalysts
at Merrill Lynch forecast the dividend to rise to $1.60 a share
Risks to Consider:
An economic slowdown, a majoracquisition or a large
share-buyback program all could impede the path to robust
Action to Take -->
By establishing a multi-year track record of robust dividend
growth, these companies are sending a clear signal: The dividend
boosts are a long-term priority, not a passing fad. With that
commitment in place, the stocks I've highlighted should do well
if thestock market eventually cools off, as their annual yields
will provide safety in the storm.
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