10/23/2012 5:15 PM ET|
4 stocks with growing dividends
Stocks with fat payouts often come with problems. A smarter way to get nice income is to buy shares with modest but rising payouts.
Today's menu of investments that yield 8% and higher is short and not especially appetizing. Greek government bonds, anyone? Stock investors, however, can unlock surprisingly powerful yields through a combination of careful selection and patience.
The wrong way to proceed is to simply grab the market's highest yielders. Six companies in the Standard & Poor's 500 Index ($INX) now yield more than 6%. There's Pitney Bowes (PBI), which makes postage machines; R.R. Donnelley & Sons (RRD), a bulk printer; and a handful of rural telephone companies. All face declining sales, high debt or other challenges. Donnelley got a black eye just last week when Google (GOOG) blamed it for the premature release of its quarterly results.
A better way to get yield, especially now, is to identify companies that pay modest dividends today but look likely to pay much larger ones in years to come.
Over the long haul, stocks with rising payouts have delivered better total returns than dividend payers as a whole.
For example, 10 years ago Darden Restaurants (DRI), owner of the Olive Garden and Red Lobster chains, paid shareholders a 4-cent quarterly dividend. Based on the $19 share price at the time, that worked out to an unexciting yield of about 0.8%.
Darden, however, has steadily increased its dividends since then and pays 50 cents per quarter. Shares yield 3.7%, which is handsome enough compared with the S&P 500's yield of 2.1%. But the investor who bought 10 years ago is collecting a yield of over 10%, calculated against his original price. He has been well-rewarded for the wait, and not just in dividends. The rising payments have helped Darden's stock price nearly triple, trouncing the S&P.
That's part of a broader trend of rising dividends paying off for investors. According to a study by mutual-fund company T. Rowe Price, $100 invested in the Russell 1000 Index ($RUI) at the end of 1978 would have grown to $4,055 by this past July. Invested in only the index's dividend-payers, it would have turned into $4,573. And invested in only the dividend-growers it would have become $5,244.
Now may be an especially good time to favor companies whose dividends are modest but have plenty of potential for growth. With the baby boomers entering retirement and looking to draw more income from their investments, and bond yields sitting near historic lows, investors have piled into dividend stocks. That has left shares of big payers looking pricey. Among S&P 500 dividend-payers, those that spend more than half their profits on dividends recently traded at a median of 16.3 times earnings, versus 13.9 times for those that pay less than half.
At the same time, all that demand for dividends has made companies more willing to part with payments. The number of S&P 500 members that pay dividends, 403, is the highest since 1999, according to Howard Silverblatt, the Standard & Poor's analyst for its indexes. Index members have increased dividend spending by $38.4 billion so far this year, versus $34.5 billion during the same stretch last year. There's plenty of room for more growth: The companies are paying out only around one-third of earnings as dividends, versus a historical average of more than half.
The four companies on the table below have dividend yields that aren't the largest around. However, the amounts that Wall Street analysts predict each will pay by 2014 work out to plumper yields when calculated against today's price. And these companies have potential to keep increasing their payments for much longer, judging by the low portion of earnings each now pays.
Like many banks, Wisconsin-based Associated Banc-Corp (ASBC) slashed its dividend payment following the global financial crisis but has begun to rebuild it. Quarterly results, reported Thursday, show gains in lending, deposits and earnings per share.
Coca-Cola Enterprises (CCE) has a sturdy product line but its market, Western Europe, has been wobbly of late. Wall Street expects revenues for the company to dip 2% this year before rising 5% next year. But there's a perk for patient investors: The stock is 30% cheaper than Coca-Cola (KO) based on earnings.
IBM (IBM) shares shed 8% this past week after a Tuesday quarterly report in which the tech giant missed revenue forecasts. A weak euro and slow economic growth cut into results, but management stood by its full-year earnings guidance, suggesting it expects a healthy pace of late-year orders. The sell-off presents a buying opportunity for long-term investors, given IBM's record of driving profits and dividends steadily higher over the past decade.
Stryker (SYK) makes artificial knees and hips. It missed earnings per share estimates by a penny this past week and said full-year earnings would likely increase 8%, down from its previous guidance of 10%, citing a slowdown in Europe and some product recalls. Over the long term, however, Stryker is benefiting from rising average ages in developed markets (and ballooning body weight). It also holds net cash equal to about 8% of its stock-market value.
More from Barron's:
VIDEO ON MSN MONEY
Invest in dividend companies that you use is a simple plan. In this way growth helps pay the bill in the future and dividends help cover dips in the market. I own DUK since itr is my power provider.
Pays 4.71% My busineess line is CTL. Pays 7.58 % My cell is VZ. Pays 4.67% Invest in the companies you patronize and share in their profits. These diviidends are a heck of a lot more than treasury bonds and if you have faith that America will figure out this mess, than keep the faith.
If we are all wrong and the world economy explodes, your money in the mattress, bank, or market will have little value so take a chance. I'll bet on America.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market ended the Thursday session on a modestly lower note, but a late-morning rebound lifted the indices off their lows. The S&P 500 shed 0.2% with seven sectors ending in the red.
This morning, European equities and U.S. futures slumped around 6:00 ET after Ukraine's President Petro Poroshenko was quoted as saying Russian forces have invaded an area southeast of Donetsk. The news pressured the markets, but a brief uptick took place after a correction to ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'