You Can Find Income Everywhere

5/12/2014


Every sector of the S&P 1500 Index paid out more in dividends last year than it did three years earlier. And if profits grow as fast as expected, that trend should continue over the next three years.

MOST SECTORS CAN HANDLE HIGHER DIVIDENDS
Nine of the S&P 500 Index's 10 sectors managed at least 8% annualized growth in cash dividends over the last three years, and seven grew dividends faster than earnings. Most of the sectors seem capable of enough profit growth to support continued dividend increases. However, three-year dividend growth covers a period when many firms were ramping up after cuts or plateaus in 2008 and 2009, and we expect slower growth over the next three years.
--------- Index Per-Share-Profit Growth ---------
Cash-Dividend Growth
---- Estimated ----
S&P 500 Sector Index
Last 12
Months
(%)
Last 3
Years
(Ann.)
(%)
Fourth
Quarter,
2013
(%)
First
Quarter,
2014
(%)
2014
2015
Consumer Discretionary
9
17
8
6
9
19
Consumer Staples
18
12
4
3
6
9
Energy
9
13
(9)
(2)
9
7
Financials
10
9
25
(1)
8
12
Health Care
7
11
10
11
12
12
Industrials
1
11
14
4
9
12
Materials
(7)
11
22
0
10
19
Technology
44
37
10
9
10
11
Telecom
(2)
3
25
14
17
7
Utilities
5
8
(6)
21
7
3
S&P 500
11
14
10
5
9
12
Source: Standard & Poor's, Thomson Reuters.    * Blend of actual and estimated profits.

According to Standard & Poor's, in the March quarter U.S.-traded stocks declared 9,802 dividends, up nearly 7% from the same period in 2013 and the highest number in at least 11 years. That kind of expansion suggests a broader swath of stocks is playing the dividend game.

Traditionally dividend-heavy sectors such as consumer staples, industrials, telecom, and utilities each account for a similar percentage of the S&P 1500's total dividends today as they did at the end of 2004. However, the financial sector has charted a different course.

At the end of 2004, financial stocks accounted for 29.1% of the S&P 1500 Index's dividends, versus 14.6% today. In contrast, sectors not known for dividends — consumer discretionary (9.0% today, 6.2% in 2004), energy (11.6%, 7.9%), and technology (15.2%, 5.1%) — have seen their contributions rise.

In general, more companies have started to pay dividends (66% of the S&P 1500 today versus 59% in 2004), and the average yield has increased to 1.5% from 1.1% in 2004.

Over the last decade, the percentage of energy, health-care, industrial, and technology stocks paying dividends has risen. Increased participation drove up the average yield, but the average dividend-payer's yield has also risen. The payout power of the three upstart sectors suggests the financial sector won't get back to 29% of the index's dividends soon, if ever.

In each of the last five calendar years, the S&P 500 Index delivered an income return of at least 2.1%. We haven't seen such a five-year stretch since 1993 through 1997, and last year's 2.8% income return is well above the 15-year average of 2.0%.

A DIVERSIFIED MENU OF DIVIDEND PAYERS
Below we present two attractive dividend selections from each of the 10 market sectors. We required a yield of at least 1% and sufficient profit-growth potential to support continued solid hikes in the payout. Stocks in bold are on our buy lists. The others are pulled from the Monitored List (rated A, or above average) or our Top 15 Utilities portfolio.
Div. Growth
----- Est. Profit Growth -----
Company (Price; Ticker)
Div.
($)
Yield
(%)
Last
Hike
(%)
Last
3 Yrs.
(Ann.)
(%)
Curr.
Fiscal
Year
(%)
Next
Fiscal
Year
(%)
Next
5 Yrs.
(Ann.)
(%)
Consumer Discretionary
Foot Locker ($47; FL)
0.88
1.9
10
12
12
10
10
Magna Int'l ($98; MGA)
1.52
1.6
19
22
11
16
13
Consumer Staples
CVS Caremark ($74; CVS)
1.10
1.5
22
33
11
13
13
Kroger ($46; KR)
0.66
1.4
10
17
13
10
11
Energy
Helm. & Payne ($108; HP)
2.50
2.3
25
115
12
12
16
Schlumberger ($101; SLB)
1.60
1.6
28
20
20
19
18
Financials
BlackRock ($296; BLK)
7.72
2.6
15
15
12
13
13
Wells Fargo ($49; WFC)
1.40
2.9
40
51
5
5
8
Health Care
Aetna ($72; AET)
0.90
1.2
10
14
10
11
11
Amgen ($112; AMGN)
2.44
2.2
30
30
6
8
8
Industrials
Dover ($85; DOV)
1.50
1.8
7
10
(9)
12
12
Union Pacific ($187; UNP)
3.64
1.9
15
32
16
14
15
Materials
Dow Chemical ($49; DOW)
1.48
3.0
16
28
21
18
8
Packaging Corp. ($66; PKG)
1.60
2.4
28
32
41
18
17
Technology
Apple ($594; AAPL)
13.16
2.2
8
NA
11
9
13
Qualcomm ($79; QCOM)
1.68
2.1
20
28
15
11
13
Telecom Services
AT&T ($35; T)
1.84
5.2
2
2
7
4
5
Verizon Commun. ($47; VZ)
2.12
4.5
3
3
25
8
8
Utilities
PNM Resources ($26; PNM)
0.74
2.8
12
14
4
7
9
UGI ($46; UGI)
1.18
2.5
4
6
11
5
7
NA Not available because company didn't pay dividends three years ago.

Fortunately, it's never been easier to construct a diversified portfolio of dividend-paying stocks. The table above identifies a couple of intriguing dividend payers in each sector, most of which are on our buy lists. Four are stocks rated A (above average) on our Monitored List, while another is pulled from our Top 15 Utilities portfolio. Three stocks from our Focus List are reviewed in the following paragraphs:

Dow Chemical ($49; DOW), added to the Focus List in the May 5 issue, yields 3.0%. But don't write the chemical giant off as solely a source of income — the consensus projects per-share-profit growth of 19% this year and next year. Dow topped the March-quarter profit consensus by 11%, and estimates are on the rise. In January, the company raised its quarterly dividend 16% to $0.37 per share. The payout has risen 146% since 2009 but still lags the $0.42 per quarter paid out in 2008. Operating cash flow rose 74% to $7.95 billion in the 12 months ended March — enough to cover its $1.86 billion in cash dividends more than four times over. The company sells to customers in 160 countries, generating 36% of 2013 sales from North America; 31% from Europe, the Middle East, and Africa; 17% from Asia; and 16% from Latin America.


In the year ended January, Foot Locker ($47; FL) managed same-store-sales growth of 4.2%, with a 5.3% gain in the January quarter. In March, the company reported same-store sales growth had accelerated to low-double-digit rates in February. In the wake of the strong January quarter (28% profit growth), Foot Locker boosted its dividend 10%. Analysts expect per-share-profit growth of 15% for the April quarter and 12% in the year ending January 2015. Despite Foot Locker's fast growth track, at 16 times trailing earnings it trades at a 15% discount to the median specialty retailer in the S&P 1500 and 24% below its own five-year average.


Investors in contract driller Helmerich & Payne ($108; HP) have struck a dividend gusher. In November 2012, H&P paid a quarterly dividend of $0.07 per share. The February 2014 payment was $0.625 per share, up almost 800%. Credit three dividend hikes — 114% to $0.15 per share in December 2012, 233% to $0.50 in June 2013, and 25% in February 2014 — for the payout renaissance. H&P now yields 2.3%, well above the average of 1.9% for contract drillers in the S&P 1500 and 1.7% for all dividend-payers in the broad energy sector. H&P manages this market-beating yield without breaking a sweat; the estimated year-ahead dividend payout of $2.50 per share equates to less than 37% of the $6.76 per share in profits analysts expect over the next 12 months.

SECTOR YIELDS CHANGE OVER TIME
-------------- End Of 2004 --------------
-------------- End Of 2009 --------------
------------------ Today ------------------
Sector
% Of Cos.
W/Divs.
Average
Yield
(%)
Avg. Yield
Of Payers
(%)
% Of Cos.
W/Divs.
Average
Yield
(%)
Avg. Yield
Of Payers
(%)
% Of Cos.
W/Divs.
Average
Yield
(%)
Avg. Yield
Of Payers
(%)
S&P 1500
59
1.1
1.9
55
1.3
2.4
66
1.5
2.2
Consumer Discretionary
62
0.9
1.4
43
0.8
1.9
58
1.1
2.0
Consumer Staples
79
1.5
2.0
75
1.9
2.6
79
1.8
2.3
Energy
52
0.6
1.2
55
0.8
1.5
60
1.0
1.7
Financials
92
2.2
2.4
84
2.5
3.0
89
2.5
2.8
Health Care
32
0.3
1.1
25
0.4
1.7
37
0.6
1.7
Industrials
64
0.9
1.4
69
1.3
1.8
80
1.2
1.5
Materials
82
1.4
1.7
81
1.5
1.8
82
1.5
1.8
Technology
21
0.2
0.9
22
0.4
1.7
37
0.7
2.0
Telecom
60
2.1
3.4
50
3.8
7.7
67
3.8
5.7
Utilities
88
3.4
3.9
96
4.0
4.2
100
3.5
3.5

 


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