Our Top Four Dividend Picks

10/14/2013


Dover ($88; DOV) shares have rallied 3% since the end of August and trade within 6% of their all-time high. Yet the stock's yield of 1.7% remains attractive relative to other S&P 500 Index industrial stocks, which average a yield of 1.2%. Credit the superior yield largely to Dover's 58 consecutive years of dividend growth, the fourth-longest streak of its kind among publicly traded companies, according to Mergent's Dividend Achievers. Dover's quarterly dividend has more than doubled since 2007, and hikes in the past three years have ranged from 7% to 15%.

Stock repurchases reduced Dover's outstanding shares by 7% in the year ended June. In retrospect the buybacks look like a shrewd move, considering Dover paid an average of less than $64 per share. Management has suggested share repurchases could total $100 million to $200 million in the second half of 2013, compared to $351 million in the first six months of the year. Dover is a Focus List and a Long-Term Buy.


Helmerich & Payne's ($72; HP) 2.8% yield is nearly three times the average for energy stocks in the S&P 1500 Index. It also dwarfs H&P's historical yield, which has fluctuated between 0.4% and 0.7% for most of the past eight years. In June H&P boosted its quarterly per-share dividend to $0.50 from $0.15. Among the more than 270 dividend increases made by S&P 500 Index companies through the first eight months of 2013, only six topped H&P's 233%.

Sales growth has decelerated in five straight quarters, and that trend may have continued into the September quarter, with the consensus projecting just 2% growth. But H&P's cash from operations surged 29% to $1.15 billion in the 12 months ended June, with free cash flow turning positive in that one-year period. In October, H&P said if commodity prices hold at current levels, it should keep gaining traction in the U.S. market for land rigs. HP has grown its share of that market to 15% from 9% in October 2008. H&P is a Focus List Buy and a Long-Term Buy.


Last month, Qualcomm ($66; QCOM) shares reached their highest price since 2000. The share-price momentum coincides with a dividend yield within striking distance of its all-time high. Qualcomm yields 2.1%, down slightly from its record of 2.3% but nearly three times the average for S&P 1500 technology stocks.

Moreover, Qualcomm's six-month average yield of 2.0% represents an all-time high. Recall that Qualcomm hiked its quarterly distribution 40% in March, its largest increase since 2004. The company has the flexibility to deliver more dividend growth, considering 12-month free cash flow rose 29% to $4.73 billion, loading the balance sheet with $11.46 billion in cash versus virtually no long-term debt.

Qualcomm's per-share profits surged 32% over the past year as smartphones attracted an increasingly large number of consumers. But the stock has battled investor concerns that smartphone growth will fade in the next couple years, especially the high-end devices that use Qualcomm's most profitable components. Still, Qualcomm seems capable of outgrowing its sector despite the lower expectations. The consensus calls for Qualcomm to increase per-share profits 10% in the 12 months ending June 2014, while the S&P 500 technology sector seems likely to post single-digit growth. At 15 times trailing earnings, the stock trades 30% below its five-year average and 23% below its sector median. Qualcomm is a Focus List Buy and a Long-Term Buy.


Wells Fargo ($40; WFC) keeps restoring its quarterly dividend, slashed 85% to $0.05 per share in March 2009. After a pair of hikes in the last year, the dividend has grown to $0.30 per share quarterly, within 12% of its pre-crisis peak. Even with the shares up 16% for the year, Wells Fargo's dividend yield of 3.0% hovers near its highest level since May 2009. Note that Wells Fargo's current payout ratio of 33% remains well below the 45% rate the bank averaged in the five years leading up to 2008.

Investor sentiment about banks has turned negative in recent weeks on concerns over soft trading volumes and mortgage activity. Modest expectations set a lower bar for banks to clear, potentially leaving room for them to surprise to the upside. Wells Fargo is scheduled to post June-quarter results Oct. 11, after our deadline. Wells Fargo is expected to earn $0.97 per share, up 10%, on a 1% revenue decline. The bank has topped consensus profit estimates in seven straight quarters. Wells Fargo is a Focus List Buy and a Long-Term Buy.

DIVIDEND ELITES
Below we present 11 Buy-rated stocks, all of which yield more than the average stock in the S&P 1500 Index, as well as the averages for their sector and industry. Payout ratio is the percentage of trailing earnings paid out in dividends.
Div.
Payout
Ratio
(%)
Avg.
Yield
(%)
Avg.
Yield
(%)
Quadrix Scores
Company (Price; Ticker)
Div.
($)
Yield
(%)
Industry
Sector
Value
Overall
Advice *
Apple ($481; AAPL)
12.20
2.5
30
Computer
Hardware
1.4
Technology
0.8
95
98
Buy 
Cisco Systems
($23; CSCO)
0.68
3.0
34
Commun.
Equipment
0.8
Technology
0.8
93
91
Focus 
Dover ($88; DOV)
1.50
1.7
31
Industrial
Machinery
1.3
Industrials
1.2
62
89
Focus 
Fifth Third Bancorp
($18; FITB)
0.48
2.7
27
Regional
Banks
2.1
Financials
2.7
91
88
Buy 
Foot Locker ($32; FL)
0.80
2.5
30
Apparel
Retail
1.2
Cons.
Discretion.
1.1
93
87
Buy 
Helmerich & Payne
($72; HP)
2.00
2.8
36
Oil & Gas
Drilling
1.1
Energy
0.9
83
99
Focus 
J.P. Morgan Chase
($51; JPM)
1.52
3.0
25
Diversified
Fin'l Svcs.
1.1
Financials
2.7
96
94
Focus 
Macy's ($42; M)
1.00
2.4
27
Department
Stores
1.5
Cons.
Discretion.
1.1
94
73
Buy 
Magna Int'l
($82; MGA)
1.28
1.6
21
Auto Parts
& Equip.
1.4
Cons.
Discretion.
1.1
76
98
Focus 
Qualcomm
($66; QCOM)
1.40
2.1
32
Commun.
Equipment
0.8
Technology
0.8
76
98
Focus 
Wells Fargo
($40; WFC)
1.20
3.0
33
Diversified
Banks
2.4
Financials
2.7
91
94
Focus 
Note: Quadrix scores are percentile ranks, with 100 the best.     * Also qualify as Long-Term Buys.

TOP YIELDS, BOTTOM PERFORMANCE

In each of the last 12 rolling 12-month periods, S&P 1500 Index stocks that don't pay dividends have underperformed the average stock in the index, lagging by an average of 2.5%. However, that doesn't mean high-yield stocks have performed well.

Moderate yields have been the sweet spot, with stocks yielding up to 1.5% outperforming by 2.8% in the year ended September and stocks yielding 1.5% to 3% topping the average stock's return by 3.1%. In contrast, stocks yielding more than 3% underperformed by an average of 4.8%.

High-yielding stocks have underperformed the average stock in each of the last five rolling 12-month periods, averaging a lag of 3.8%. Given the high-yield group's poor fundamentals, investors shouldn't expect a return to leadership.

Stocks yielding at least 3% average Quadrix Overall scores of 48, versus averages above 60 for stocks with lower yields. Subpar Momentum and Quality scores contributed to the lower Overall scores, though high-yielders' average Value score of 56 tops the 50 for nonpayers.

However, the top yielders look somewhat expensive relative to lower-yielding stocks. Stocks with yields above 3% average P/E ratios of 22, below the average of 23 for companies that don't pay dividends but above the average of 20 for companies yielding 3% or less.


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