First-quarterearnings season has revealed a very big problem
for the S&P 500.
With weakness in China and Europe weighing on the globaleconomy
,sales growth continues to slow. That's always a concern for
investors, but after four years of extreme cost cutting that has
pushed margins to record highs, limited sales growth is a huge
headwind forearnings growth. And there is nothing more important
togains on the chart than earnings growth.
But here's the good news: The S&P 500 has never been better
equipped to combat this problem.
With the private sector sitting on record margins and
earnings,cash and short-terminvestments have grown to record
levels, up 6.1% in 2012 to $1.27 trillion. And that is how the
S&P 500 is going to counter slower sales and earnings growth
and incentivize investors: by using its record cash balance to
In fact, this is already happening. According to data from
FactSet Research Systems (
, as of March, dividend growth in the S&P 500 is up 17% from
lastyear . That rate is more than twice the long-term growth
average of just 6%.
In a great example of this trend,
Apple (Nasdaq: AAPL)
is now yielding 2.9% aftershares fell from above $700 last year
to $425. Apple has been working to grow sales and earnings, but
it turns to its record cash balance of more than $100 billion to
retain its current shareholders and attract a new class of
investors searching forincome .
Thisbullish trend in the dividend growth rate has the S&P 500
carrying an outsize 2.1%dividend yield , well ahead of the
10-yearTreasury note 'syield of just 1.7%.
As you can see, the S&P 500 isn't content to let slower sales
growth get in the way of producing gains for investors, making
this a great time to invest in companies with strong cash
balances and a history of outsize dividend growth. This is the
strategy behind Street Authority's "
," a portfolio of U.S. companies sitting on a $1.7 trillion cash
pile that could be rewarded to investors.
These are the nine S&P 500 companies that have logged the
biggest dividend growth in the past five years.
From this group, I'm highlighting
Wynn Resorts (Nasdaq: WYNN)
because of its large dividend yield and bullish growth
because of record-low valuation.
Wynn Resorts has grown its dividend an aggressive 142% in the
past five years, to an outsize 3%. But the casino and resorts
owner and operator isn't just an income play -- the company
continues to see big gains in sales and earnings.Analysts
forecast 23% earnings growth in this year and 12% annual growth
in the next five years.
In spite of an impressive 16%gain in its most recentfiscal year ,
Wynn's shares trade with a forward price-to-earnings (P/E ) ratio
of 20, just a 15% premium to the industry average.
Ensco has grown its dividend 123% in the past five years, lifting
its dividend yield to 3.6%. With natural gas and oil prices
moving higher in 2013, analysts are expecting big results from
Ensco this year, projecting earnings growth of 23%.
In the next five years, analysts are calling for earnings growth
of 25%, well ahead of the industry average of 15%. Despite these
bullish growth projections, Ensco's forward P/E ratio of 8 is a
huge discount to the industry average of 46 and the S&P 500's
Risks to Consider:
In the past few years, dividendstocks have experienced
outsize gains that have lifted shares to record highs and
compressed yields. Rotations into higher yielding stocks couldput
downward pressure on dividend stocks.
Action to Take -->
With the S&P 500 sitting on record cash and struggling to
find ways to growrevenue and earnings, many companies are
choosing to reward investors directly through dividend growth.
These nine companies are great candidates for investors searching
for income growth. From the group, I like Wynn Resorts because of
its large dividend yield and bullish growth projection, and Ensco
for its record-low valuation.
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