An Income Perspective

12/10/2012


We'll never recommend a stock simply because of its dividend yield. But if a company with solid growth potential and an attractive valuation also sports a superior yield, so much the better.

Marketwide, dividends are on the rise. In the 12 months ended September, companies in the S&P 500 Index paid out nearly $267 billion in dividends, a record high and up 16% from the year-earlier period. On a per-share basis, dividends jumped 18%.

That gain stemmed from dividend hikes and initiations by companies that previously didn't pay dividends, some of which are getting back in the game after omitting payouts during the financial crisis. Dividends are more common today (63% of S&P 1500 stocks pay dividends) than they were a decade ago (53%). Not since 1998 has a higher percentage of the index paid a dividend. The average stock in the S&P 1500 yielded 1.3% two years ago, roughly equal to the yield 10 years ago. But over the last two years, the average yield has risen to 1.6%.

DIVIDENDS BY THE NUMBERS: A SECTOR COMPARISON
% Of Stocks
Paying Dividends
Avg. Dividend
------- Yield -------
Avg. Payout Ratio
Dividend Growth
Sector
Curr.
(%)
10
Yrs.
Ago
(%)
Avg.
Since
1994
(%)
Curr.
(%)
10
Yrs.
Ago
(%)
Avg.
Since
1994
(%)
Curr.
(%)
10
Yrs.
Ago
(%)
Avg.
Since
1994
(%)
1
Yr.
(%)
5
Yrs.
(%)
10
Yrs.
(%)
Cons.
Discret.
55
48
54
1.2
0.9
1.0
20
12
15
18
7
12
Cons.
Staples
76
79
79
2.0
1.7
1.8
33
26
30
9
10
11
Energy
54
46
55
1.0
0.8
0.9
15
17
15
15
11
18
Financials
87
90
92
2.7
2.4
2.4
37
31
34
15
(4)
5
Health Care
36
28
30
0.6
0.4
0.4
10
6
8
15
12
14
Industrials
75
55
67
1.5
1.1
1.2
23
19
20
10
7
11
Materials
85
75
81
1.7
2.1
1.8
30
28
30
17
9
9
Technology
34
13
21
0.8
0.2
0.3
12
2
5
15
13
16
Telecom
Svcs.
56
44
60
3.6
1.2
2.2
49
17
30
(6)
16
16
Utilities
98
89
93
4.0
4.5
4.2
64
56
60
6
5
3
S&P 1500
Index
63
53
59
1.6
1.3
1.4
24
18
21
14
5
9
Note: Averages exclude payout ratios below 0% or above 150% and growth rates above 150%.

Where is the income?

Some 34% of technology stocks and 75% of industrials in the S&P 1500 Index now pay dividends, up from 13% and 55%, respectively, 10 years ago. While not all sectors displayed such a trend, yields and payout ratios are higher today than they were in 2002 in most pockets of the market. With that fact in mind, we offer three tips for income-seeking investors.

1) Be flexible. We all know utilities and financial stocks are more likely to pay dividends and tend to yield more than stocks in other sectors. But you can find income picks everywhere. Drugmaker Abbott Laboratories ($64; ABT) yields 3.2%, oil major Chevron ($104; CVX) 3.5%, and semiconductor giant Intel ($20; INTC) 4.5% — all in sectors not known for yield. Yes, you can build a diversified income portfolio.

2) Be real about yields. With savings accounts paying almost nothing and the 10-year Treasury bond yielding 1.6%, a common stock yielding 2.5% — on top of any potential capital gains — looks pretty good. Fewer than one in 20 S&P 1500 stocks yield more than 5%, and those stocks average mediocre Quadrix Overall scores of 43. We advise readers to focus on stocks with solid fundamentals (high Overall scores) and dividends well covered by earnings. Below, we present quality stocks that yield at least 2.5%, all of which pay out less than 50% of their profits in dividends.

3) Go for growth. Yield is only one side of the coin. You also want stocks that raise their dividends over time. In the table below, we list stocks that have grown their dividends at double-digit rates over the past five years. All yield at least 1%, and their strong cash flows and history of dividend growth suggest more growth is in store.

Below we review three intriguing dividend stocks:

Chevron's ($104; CVX) dividend yield of 3.5% more than triples the average of 1.0% for the energy sector. The dividend has risen at an annualized rate of 10% over the last decade. And with the dividend accounting for just 31% of profits, Chevron has the flexibility to keep the payout rising.

The oil giant's annual production appears headed for its third decline in five years. But the company says a slew of projects coming online should help it deliver at least 4% annual growth over the next several years. Last month, Chevron placed the highest bid for drilling rights to a tract about 140 miles south of Galveston, Texas, in the Gulf of Mexico; the U.S. banned BP ($41; BP) from participating in the auction. In other news, a Brazilan appeals court overturned a ban on Chevron operating in the country.

In Australia, Chevron is reviewing costs and schedules for its Gorgon liquefied-natural-gas project. A robust Australian dollar and rising labor rates have apparently caused costs to escalate. Moreover, production at Gorgon, originally set to start in 2014, could be delayed until 2015 because of bad weather and productivity problems. The news isn't good, but huge natural-gas projects like Gorgon frequently blow through budgets and take longer than expected. Chevron is a Buy and a Long-Term Buy.


Oil giant Exxon Mobil ($87; XOM) has increased its per-share dividend in each of the last 30 years, the latest a 21% hike in April. The indicated yield of 2.6% is more than twice the energy-sector average. Despite spending more than $30 billion per year on capital projects and about $10 billion in dividends, it's a safe bet that Exxon will continue growing the payout. The company generated nearly $54 billion in operating cash flow in the four quarters ended September, leaving plenty of room for dividend increases, as well as aggressive share buybacks. Over the last five years, a period in which Exxon paid out $43 billion in dividends, it also spent $114 billion on repurchases, reducing the share count 17% along the way.

Exxon's operating momentum has eroded in recent quarters, with sales up just 2% over the last year while per-share profits increased 1%. Production fell 7.5% in the September quarter, but the company expects production to rise 1% to 2% a year through 2016. Profits at Exxon's downstream operations are on the rise, mostly because of higher refining margins.

A combination of huge new exploration projects and rebounding U.S. natural-gas prices suggest Exxon is capable of exceeding the market's modest expectations. Exxon is a Buy and a Long-Term Buy.


Intel ($20; INTC) has the highest yield among our recommended stocks, with the quarterly payout of $0.225 per share equating to an indicated annual yield of 4.5%. Credit part of that yield to higher dividends (annualized growth of 15% over the last five years and 27% over the last 10) and part to weak stock performance (a price decline of 21% over the last six months).

Intel's poor Quadrix Momentum score of 14 and Performance score of 8 reflect a company that saw sales, profits, and cash flow fall in the last quarter. Marketwide weakness in sales of personal computers, Intel's largest end market, weighs on results. The consensus now projects per-share-profit declines of 28% in the December quarter and 8% next year. Those estimates could worsen in the near term, but Intel seems capable of positively surprising over the next two to three years. Emerging markets account for two-thirds of global PC sales, and while growth rates have fallen, these markets should be among the first to benefit from improvement in global economic conditions.

At eight times trailing earnings, Intel trades 29% below its three-year average P/E ratio and 54% below the median semiconductor maker. Intel also trades at a discount of at least 22% to its three-year average price/sales and price/book ratios. Intel, a Long-Term Buy, should reward patient investors.

TOP PICKS FOR INCOME . . .
All of the high-income picks below yield at least 2.5% yet pay out less than 50% of their earnings in dividends. All of the dividend-growth picks have increased their dividends at a double-digit rate over the last five years and yield at least 1%. Companies underlined qualify for both of the lists.
-- Average Div. Yield --
Per-Share Profits
Quadrix Scores
Company (Price; Ticker)
Div.
(%)
Yield
(%)
Payout
Ratio
(%)
Last
5 Yrs.
(%)
Last
10 Yrs.
(%)
Last
12 Mos.
($)
12-Mo.
Growth
(%)
5-Yr.
Annual.
Growth
(%)
Fin'l
Str.
Overall
Sector
Abbott Laboratories
($64; ABT)
2.04
3.2
41
3.2
2.8
5.01
10
13
79
75
Health Care
BB&T ($28; BBT)
0.80
2.9
31
4.1
3.9
2.59
69
(2)
69
72
Financials
Chevron ($104; CVX)
3.60
3.5
31
3.3
3.3
11.68
(10)
8
89
65
Energy
Cisco Systems
($19; CSCO)
0.56
2.9
29
NM
NM
1.90
22
5
79
95
Technology
Fifth Third Bancorp
($14; FITB)
0.40
2.8
27
2.4
2.8
1.47
24
(7)
91
85
Financials
Intel ($20; INTC)
0.90
4.5
37
3.2
2.2
2.41
(4)
18
93
72
Technology
J.P. Morgan Chase
($41; JPM)
1.20
3.0
25
2.3
3.0
4.82
(3)
(1)
94
96
Financials
Microsoft ($26; MSFT)
0.92
3.5
35
2.2
NM
2.64
(6)
11
97
78
Technology
Wells Fargo ($33; WFC)
0.88
2.7
28
2.5
2.8
3.18
11
4
77
91
Financials
. . . AND DIVIDEND GROWTH
-- Annual. Div. Growth --
Per-Share Profits
Quadrix Scores
Div.
(%)
Yield
(%)
Payout
Ratio
(%)
Last
5 Yrs.
(%)
Last
10 Yrs.
(%)
Last
12 Mos.
($)
12-Mo.
Growth
(%)
5-Yr.
Annual.
Growth
(%)
Quality
Overall
Aetna ($43; AET)
0.80
1.8
15
82
55
5.17
5
9
81
77
Health Care
Aflac ($53; AFL)
1.40
2.7
21
10
19
6.60
55
14
89
100
Financials
CVS Caremark
($46; CVS)
0.65
1.4
20
22
19
3.20
19
10
80
85
Cons. Staples
Exxon Mobil ($87; XOM)
2.28
2.6
29
10
10
7.86
1
4
79
81
Energy
Qualcomm
($63; QCOM)
1.00
1.6
27
12
NM
3.72
17
12
91
90
Technology
UnitedHealth Group
($54; UNH)
0.85
1.6
16
95
60
5.25
14
9
83
84
Health Care
Wal-Mart Stores
($72; WMT)
1.59
2.2
33
13
18
4.79
11
10
78
67
Cons. Staples
Notes: Payout ratio represents the indicated 12-month dividend divided by trailing 12-month earnings.   Quadrix scores are percentile ranks, with 100 the best.     NM Not meaningful because the companies didn't pay a dividend five or 10 years ago.

 


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