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3 Dividend Stocks That Should Be Ashamed of Their Current Payouts

Businessman Counting His Money Dividend Getty
Businessman Counting His Money Dividend Getty

Dividend stocks are often the foundation upon which great retirement portfolios are built.

Image source: Getty Images.

Generally speaking, dividend stocks offer four key advantages over companies that don't pay a dividend. To begin with, the business models of dividend-paying companies are often time-tested; otherwise the company wouldn't regularly pay out a percentage of its income to investors. Secondly, dividend payments can help hedge against inevitable stock market corrections. Third, dividend stocks have historically outperformed non-dividend-paying stocks over the long run. And finally, dividend payments offer the opportunity to set up a dividend reinvestment plan, or DRIP, whereby your payout is reinvested in more shares of a dividend-paying stock, which leads to the ownership of more shares of stock and thus a bigger dividend payout -- it's a virtuous cycle.

Investing in dividend stocks and setting up DRIPs is a common way seasoned money managers make bank for their clients over the long run -- and outpace the return of the broader market.

However, "dividend stock" is a pretty broad term. Right now, there are 1,180 publicly traded companies with a market cap of at least $2 billion that have paid a dividend to investors at some point over the trailing-12-month period (note: This includes one-time special dividends as well). And not all dividend stocks are created equally.

Senior Couple Social Security Cola Inflation Getty

Image source: Getty Images.

Three dividend stocks that make you think, "Why bother?"

On one end of the spectrum are stocks with high yields of more than 4%, as well as about 50 so-called Dividend Aristocrats that have raised their payouts for at least 25 years straight. These are the types of stocks that can provide peace of mind and a healthy income stream for investors. On the other end of the spectrum we have the "why even bother" dividend stocks. These are companies that have ample cash flow and presumably strong profitability, yet pay a shamefully small dividend to their shareholders.

Here are three companies that fall into the latter crowd -- "dividend stocks" that should really be ashamed of their current payout.

Pioneer Natural Resources

In some respects, I can understand why an oil producer would decline to lift its dividend, given that crude prices have been so volatile over the past three years. However, Pioneer Natural Resources (NYSE: PXD) isn't your average driller, and its current payout of $0.08 per share a year (a 0.04% yield) is an embarrassment considering how healthy its balance sheet is and how profitable it's expected to be at $55-per-barrel oil.

Over the last couple of years, pretty much all drillers have struggled to some degree, but not Permian Basin-based Pioneer Natural Resources. Pioneer aggressively hedged a lot of its production, minimizing its exposure to market fluctuations in crude pricing. It has also been selling off a number of its non-core assets in an attempt to minimize its debt and focus only on its top-producing wells in Spraberry/Wolfcamp. What we're left with is a company with net debt-to-book capitalization of just 3% and the expectation that debt to EBITDA will remain below one through 2020 as long as oil remains around $55 a barrel.

Oil Drilling Multiple Pump Jacks Getty

Here are just some of the ridiculous growth expectations Pioneer brings to the table with oil at just $55 (remember, we were talking about $100 oil just a few years ago):

Image source: Getty Images.

  • Annual cash flow growth of greater than 25% through 2020.
  • Capital expenditures derived entirely from operating cash flow through 2018, meaning there's no additional need to borrow.
  • Production growth estimated at 15% per year through 2020.

These figures from Pioneer's December presentation suggest the company is in great shape compared to its peers -- though its dividend would suggest otherwise. Despite Wall Street estimates of nearly $12 in EPS and more than $33 in cash flow per share in 2019, Pioneer continues to pay a dismal dividend. Perhaps it's time to fix that, Pioneer!

CIGNA Corporation

CIGNA (NYSE: CI) , one of the nation's biggest national health insurance providers, has found itself on a rollercoaster ride over the past couple of years thanks to the implementation of the Affordable Care Act, best known as Obamacare. Initially, Obamacare was expected to bring CIGNA and its peers millions of new enrollees, but initial enrollment estimates from the Congressional Budget Office proved too aggressive, and young adults who are vital to the sustainability of the ACA never welcomed the new health law with open arms. For most insurers, including CIGNA, the ACA has been a money-losing venture.

Stethoscope Over Money Healthcare Costs Obamacare Getty

Image source: Getty Images.

But here's the thing about CIGNA: Obamacare enrollment makes up only a small fraction of its total enrollment. Commercial insurance deals are CIGNA's bread and butter, and it's having no issues passing along higher premiums and gaining new members in its commercial segment. Even with ACA uncertainty and subpar Medicare Part D reimbursement growth, CIGNA's profits are pushing higher. CIGNA wound up netting 328,000 new medical customers as of Q3 2016, and the company's somewhat recent decision to reduce its county-based Obamacare coverage by nearly 70% should result in higher margins in the quarters to come.

Despite this fact, CIGNA's current dividend yield of 0.03% is downright insulting to income seekers. Wall Street estimates that CIGNA will grow its full-year EPS from nearly $8 in 2016 to $12.47 by 2019, all while generating more than $12 in cash flow per share in fiscal 2017. And you're telling me this "dividend stock's" management can only spare $0.04 per year for shareholders? This Fool believes CIGNA's management team should consider rewarding investors for their considerable patience.

Fair Isaac Corporation

A final dividend stock that deserves a vigorous finger wag is predictive data analytics company Fair Isaac Corporation (NYSE: FICO) . More commonly known as FICO, the company produces the credit scores that are so near and dear to our hearts.

Credit Report Credit Score With Calculator Getty

Image source: Getty Images.

Like most finance-based data analytics companies, FICO is cyclical, meaning the Great Recession really sacked new bookings. However, FICO has been benefiting from a multiyear bull market, and the company's fiscal 2016 results show it. For the year, FICO's transactional and maintenance segment, by far its largest, generated nearly $606 million in revenue -- a $41.7 million improvement from the prior year. Almost the entirety of that increase came from its "Scores" division. Professional services was a standout as well, with growth of $18 million, or 12%. Revenue growth for fiscal 2017 looks to be on the order of 5%.

More recently, we've also witnessed the U.S. economy improving. Third-quarter GDP growth came in at 3.5%, which is the strongest pace in two years. A more confident growth environment could spur bigger deals and longer booking terms for FICO.

Despite the economy working in FICO's favor, the company is currently paying out a paltry $0.02 per share each quarter, which amounts to an annual dividend yield of 0.07%! Mind you, Wall Street expects FICO to rake in $3.44 in EPS in fiscal 2017 and approach $5 in EPS by 2019. That works out to a current-year payout ratio of just over 2%! With FICO's higher-margin businesses firing on all cylinders and the U.S. economy finally cooperating, it's time for Fair Isaac to give shareholders a much-deserved dividend hike.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has adisclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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