Dividends Three Ways

11/10/2014


Corporate America is feeling generous.

In the 12 months ended September, U.S. companies declared $55.5 billion in dividend increases or new dividends, up 27% from the same period a year earlier. In the September quarter alone, firms announced 563 dividend hikes or initiations, up 19% year-over-year. Dividend increases totaled $10.5 billion in the quarter, while companies that didn't pay dividends before pledged nearly $2.4 billion in new payouts.

A rising tide of dividend-payers creates more options for income-craving investors. At the end of October, 85% of S&P 500 companies and 47% of the roughly 5,000 stocks in our Quadrix research universe paid dividends. Ten years ago, 75% of the S&P 500 and just 41% of our research universe paid dividends.

The average S&P 500 Index stock yields 1.9%, while the average is 2.2% excluding non-dividend-payers; both yields are slightly below levels at the end of 2013. Credit the index's 9.5% price gain so far this year for offsetting the effect of dividend hikes and initiations.

Over the last 25 years, per-share profits for the S&P 500 Index have grown at an annualized rate of 6%, outstripping per-share-dividend growth of 5%. However, dividends rose at a 15% annual clip over the last three years, more than twice the profit-growth rate of 7%. Dividends for the year ended September accounted for just over one-third of profits, and large-cap stocks still have plenty of flexibility for further increases.

Here at the Forecasts, we like yield as well as capital gains, though we gravitate toward companies that increase their dividends over time and look attractive from a variety of angles. This week we combed through our A-rated stocks — companies we already consider above average — to find three types of income opportunities.

Fast dividend growers

For this screen, we required companies to pay a larger yield than their average over the last three years. The screen ended up ruling out most stocks that didn't aggressively grow their dividend; all the companies that made it through our screen have delivered annualized dividend growth of more than 15% over the last three years. To ensure that we didn't wind up with companies that pay big yields because their share price crumbled, we also ruled out any stocks that didn't outgain the S&P 500 Index during that three-year period.

DIVIDEND GROWERS WITH RISING YIELDS
The nine A-rated stocks below all yield more than their three-year average despite outgaining the S&P 500 Index over that three-year period. All nine also grew their dividend at an annualized rate of at least 15%. Recommended stocks are listed in bold.
Div.
($)
Yield
(%)
3-Year
Avg.
Yield
(%)
Payout
Ratio
(%)
3-Year Annual.
Sector
Company (Price; Ticker)
Div.
Growth
(%)
Price
Change
(%)
Boeing ($124; BA)
2.92
2.4
2.2
33
20
24
Industrials
Capital One Fin'l
($82; COF)
1.20
1.5
1.0
16
82
21
Financials
EOG Resources
($96; EOG)
0.67
0.7
0.5
8
28
21
Energy
Macy's ($57; M)
1.25
2.2
1.9
25
46
22
Discretionary
Morgan Stanley
($35; MS)
0.40
1.1
1.0
13
26
28
Financials
Southwest Airlines
($37; LUV)
0.24
0.7
0.6
11
137
62
Industrials
TJX Companies
($64; TJX)
0.70
1.1
1.0
21
23
28
Discretionary
Valero Energy
($50; VLO)
1.10
2.2
2.1
20
77
25
Energy
Wells Fargo
($54; WFC)
1.40
2.6
2.6
33
43
28
Financials
Note: Payout ratio reflects trailing 12-month dividends as a percentage of trailing 12-month earnings.

The table above lists nine fast dividend growers, two of which are profiled below:

Department-store chain Macy's ($57; M) has raised its dividend at an annualized rate of 46% over the last three years and nearly 17% over the last decade. A yield of 2.2% tops the company's three-year average of 1.8% as well as the average of 1.7% for department stores in the S&P 1500 Index. Macy's payout ratio of 25% — meaning it paid out just one-fourth of earnings in dividends over the last four quarters — leaves plenty of room for future hikes.

Macy's has grown per-share profits at least 5% in each of the last 15 quarters, with median growth of 23% over that period. The consensus projects per-share-profit growth of 9% in the second half of fiscal 2015 ending January, accelerating to 13% in fiscal 2016 and annually over the next five years. While dividend growth over the next three years probably won't match the rate of the previous three years, annual growth in the 15% to 20% range — in line with the 10-year average — is possible. Macy's is a Buy and a Long-Term Buy.


Like many big banks, Wells Fargo ($54; WFC) was forced to slash its dividend in 2009 and keep it low for two years. But after the Federal Reserve gave Wells Fargo the OK to boost its payout, the dividend jumped 140% in 2011, 83% in 2012, 36% in 2013, and 17% this year. At 2.6%, Wells Fargo pays the second-highest yield among diversified U.S. banks.

The company's dividend-growth rate may slow further in coming years, but investors can expect the spigot to remain open. Wells Fargo had a history of dividend increases before the government-mandated cut in 2009, and in recent years the company has repeatedly talked about the importance of its dividend.

At 13 times trailing earnings, Wells Fargo trades 16% below the median bank stock in the S&P 1500 and 7% below its own 10-year average. Wells Fargo is a Focus List Buy and a Long-Term Buy.

Industry-beating yields

We looked for stocks yielding more than their industry average, but also required high Quadrix Overall scores, as well as solid Momentum and Value scores, to keep us out of income traps. See the table below for 12 stocks that meet our criteria.

STOCKS WITH INDUSTRY-BEATING YIELDS
All 12 of the A-rated stocks below yield at least 1% and top their industry average yield. In addition, they earn Quadrix Overall scores above 80 and Momentuma and Value scores above 60. Recommended stocks are listed in bold.
Industry
Average
Yield
(%)
------ Quadrix Scores ------
Company
(Price; Ticker)
Div.
($)
Yield
(%)
Industry
Momen-
tum
Value
Overall
Aetna ($84; AET)
0.90
1.1
Managed
care
0.5
62
87
92
Apple
($109; AAPL)
1.88
1.7
Tech
hardware
1.4
88
72
99
Boeing ($124; BA)
2.92
2.4
Aerospace 
1.1
64
70
88
Foot Locker
($53; FL)
0.88
1.7
Apparel
retail
1.4
95
67
97
Hewlett-Packard
($36; HPQ)
0.64
1.8
Tech
hardware
1.4
72
92
86
Intel ($34; INTC)
0.90
2.7
Semiconductors
1.2
87
64
96
Macy's ($57; M)
1.25
2.2
Department
stores
1.7
66
87
90
Manulife Fin'l
($19; MFC) e
0.57
3.0
Life & health
insurance
1.7
72
97
91
MetLife
($54; MET)
1.40
2.6
Life & health
insurance
1.7
69
97
90
Morgan Stanley
($35; MS)
0.40
1.1
Invest.
banking
1.0
70
95
93
National Oilwell
($72; NOV)
1.84
2.6
Oil & gas
equipment
0.9
75
97
91
Toyota Motor
($121; TM) e
2.93
2.4

Auto
manufacturing

2.3
63
87
94
Note: Quadrix scores are percentile ranks, with 100 the best.     e Dividend and yield estimated.

Two are reviewed below:

As a group, managed-care companies don't pay much of a yield, averaging 0.5%. Aetna's ($84; AET) yield of 1.1% more than doubles the industry average. The stock's Quadrix® Overall score of 92 is fourth-highest in the group, and its Value score is 87 — tops in the group and well above the industry average of 67.

Aetna also earns Momentum (62) and Quality (82) scores at least nine points above the industry average. Yet despite its fundamental strength, the shares trade at 12 times trailing earnings, 32% below the industry median. Aetna looks cheap from other angles as well, sporting price/book, price/operating cash flow, and price/free cash flow ratios at least 13% below their peer group. Aetna is a Buy and a Long-Term Buy.


More technology-hardware stocks pay dividends now than in past years, but Apple's ($109; AAPL) 1.7% yield still stands out from its industry peers in the S&P 1500, which average 1.4%. After going nearly 17 years without paying a dividend, Apple made its first quarterly payout in August 2012. Since then, the computer giant has raised the dividend twice, 15% in 2013 and 8% this year.

Apple's dividend is exceptional in another way, too. Over the last 12 months, the company has paid out $11.1 billion in dividends, good for second-most in the S&P 500 Index — only Exxon Mobil ($95; XOM) distributed more. While Apple does not boast a long dividend history, the magnitude of its payout bespeaks a commitment to sharing the cash with stockholders, and we expect the dividend to keep growing in coming years. Apple is a Focus List Buy and a Long-Term Buy.

Direct-purchase plans

Many dividend-paying stocks offer direct-purchase plans that allow investors to buy even their first share without using a traditional brokerage. To participate in the direct-purchase program, call the number provided or download the forms from the transfer agent's website.

STOCKS WITH DIRECT-PURCHASE PLANS
The 14 recommended stocks below offer direct-purchase plans that allow investors to purchase their initial investment direct from the company through a transfer agent, rather than via a traditional brokerage account. Most allow initial investments as small as $250 to $500, and one, CVS Health ($88; CVS) will let you join the plan with an initial investment of just $100.
Company (Price; Ticker)
Div.
($)
Yield
(%)
Minimum
Initial
Investment
($)
Transfer
Agent
Phone
Number
Aetna ($84; AET)
0.90
1.1
500
Computershare
800-446-2617
CVS Health
($88; CVS)
1.10
1.3
100
Wells Fargo
877-287-7526
Dover ($81; DOV)
1.60
2.0
500
Computershare
888-567-8341
Halliburton
($52; HAL)
0.72
1.4
500
Computershare
800-279-1227
J.P. Morgan Chase
($61; JPM)
1.60
2.6
250
Computershare
800-758-4651
Jones Lang LaSalle
($141; JLL)
0.50
0.4
250
Computershare
866-210-8055
Macy's ($57; M)
1.25
2.2
500
Computershare
866-337-3311
Norfolk Southern
($110; NSC)
2.28
2.1
250
Amstock
877-864-4750
Skyworks Solutions
($61; SWKS)
0.44
0.7
1,000
Amstock
877-366-6437
Southwest Airlines
($37; LUV)
0.24
0.7
250
Wells Fargo
866-877-6206
Travelers
($101; TRV)
2.20
2.2
250
Wells Fargo
888-326-5102
UGI ($38; UGI)
0.87
2.3
1,000
Computershare
800-850-1774
Union Pacific
($116; UNP)
2.00
1.7
250
Computershare
800-317-2512
Wells Fargo
($54; WFC)
1.40
2.6
250
Wells Fargo
877-840-0492

All 14 of the stocks in the table at above earn Buy or Long-Term Buy ratings, which means they're suitable for immediate purchase. One of our favorites is discussed below:

Union Pacific's ($116; UNP) 10% dividend hike in July marked the third double-digit boost in the last five quarters. Not years, quarters. The company's dividend has risen at a 28% annualized rate over the last three years and 21% annually over the last decade. Less than one-third of earnings are deployed as dividends, leaving the railroad plenty of cash for reinvestment while also keeping the door open for divided hikes in future years.

Investors can purchase their first shares of Union Pacific directly from the company, committing as little as $250, enough to buy two shares plus a fraction of a third. You can break up the $250 into five separate $50 investments if you prefer. The plan charges no fees to set up the account or make purchases and allows shareholders to have their dividends reinvested directly in stock. Union Pacific is a Focus List Buy and a Long-Term Buy.


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