Size Matters For Dividend Stocks

8/10/2015


U.S. stocks' dividend payments rose 10% in the 12 months ended June, though growth appears to be slowing. Net dividend increases totaled $49.5 billion in the past year, down from $55.1 billion in the prior 12-month period, according to Standard & Poor's.

During the June quarter, 85 companies cut or suspended their dividends, up 49% from the year-earlier period. Much of the blame goes to the energy sector's meltdown; energy stocks accounted for 45% of those dividend cuts.

Still, the majority of S&P 1500 Index stocks pay a dividend, including 84% of large-caps, 71% of midcaps, and 54% of small-caps. The Forecasts has a below-market exposure to dividend stocks, with 61% of our 31 recommended picks paying dividends. The same holds true for our sister publication Upside. Just 51% of its 37 stocks pay a dividend.

All else equal, we like dividends. However, we prefer not to make investment decisions based solely on dividend information, particularly yield. Our Quadrix stock-rating system, which considers nearly 100 statistics, demonstrates the folly of letting yield drive the bus.

To identify Quadrix's sweet spot for dividend stocks, we looked at income stocks' performance based on:

Dividend yield. We separated income stocks into one of three groups: those yielding more than 3%, 2% to 3%, and less than 2%.

Market value. As a proxy for size, we used the S&P 500 (large-caps), S&P MidCap 400, and S&P SmallCap 600 indexes.

As the table below shows, Quadrix tends to work better for lower-yielding stocks than higher-yielding stocks, though the trend isn't absolute. Remember that the returns presented include dividends.

WHAT WORKS IN QUADRIX FOR DIVIDEND STOCKS

Below we identify Quadrix category scores that work especially well for dividend-paying stocks in the S&P 600, 400, and 500 indexes. Results show outperformance of the top one-fifth of stocks based on Quadrix scores using 12-month holding periods since December 1994.

As a whole, top Quadrix scorers among lower-yielding stocks tend to deliver better outperformance than top scorers with higher yields. In the S&P 500 Index, Quadrix works better with non-dividend-payers than with dividend-payers.

Average Outperformance
------- Of Top One-Fifth Based On: -------
S&P SMallCap 600 Index
Overall
Momentum
Value
All stocks
1.5
(0.2)
2.6
Non-dividend-payers
(0.1)
(2.1)
1.5
Stocks yielding 3% or more
1.4
1.9
1.8
Stocks yielding 2% to 3%
4.0
1.6
3.7
Stocks yielding less than 2.0%
3.9
2.8
3.7
S&P MidCap 400 Index
Overall
Value
Quality
All stocks
3.0
2.4
1.9
Non-dividend-payers
3.1
2.0
1.3
Stocks yielding 3% or more
1.5
2.0
2.0
Stocks yielding 2% to 3%
1.4
2.6
1.1
Stocks yielding less than 2.0%
4.4
3.3
3.2
S&P 500 Index (large-caps)
Overall
Momentum
Value
All stocks
2.3
0.7
2.8
Non-dividend-payers
5.5
2.8
3.2
Stocks yielding 3% or more
1.3
(0.8)
2.5
Stocks yielding 2% to 3%
0.4
0.4
0.9
Stocks yielding less than 2.0%
1.9
0.5
2.6

Within the S&P 500, Quadrix works best for stocks that don't pay a dividend. In rolling 12-month periods since December 1994, nonpayers' stocks ranking in the top one-fifth based on Overall score averaged returns 5.5% above the average stock in the index. However, this outperformance has shrunk to an average of 0.6% over the past five years. Top Value and Momentum scorers show similar trends, with nonpayers outperforming payers. Among dividend-paying stocks, top scorers with yields below 2% tended to outperform those with yields of 3% or higher.

Among midcap stocks, Overall, Value, and Quality scores work fairly well regardless of dividend yield, but are most effective with stocks yielding between 0% and 2%. For the smallest stocks, those in the S&P SmallCap 600, Quadrix works markedly better with dividend-payers than with nonpayers. But once again, low-yield stocks tend to enjoy better outperformance than high-yielders.

TOP DIVIDEND PICKS IN QUADRIX
Below we screened for income stocks recommended in Forecasts or sister publication Upside that score above 80 for Overall or a top Quadrix category for their index and yield. Upside stocks are in bold.
Market
Value
($Mil.)
Div.
($)
Yield
(%)
3-Yr.
Ann.
Div.
Growth
(%)
Payout
Ratio
(%)
---------- Quadrix Scores ----------
Company
(Price; Ticker)
Momen-
tum
Value
Quality
Overall
S&P SmallCap 600 stocks
AMERISAFE
($50; AMSF)
959
0.60
1.2
NA
19
70
75
70
88
Korn Ferry Int'l
($34; KFY)
1,698
0.40
1.2
NA
21
68
68
87
90
MKS Instruments
($36; MKSI)
1,903
0.68
1.9
3
30
91
85
70
96
Selective Ins.
($31; SIGI)
1,814
0.56
1.8
2
22
93
94
69
99
S&P MidCap 400 stocks
Alaska Air
($79; ALK)
10,294
0.80
1.0
NA
15
90
75
97
99
Convergys
($24; CVG)
2,531
0.32
1.3
NA
18
74
87
68
95
Foot Locker
($72; FL)
10,295
1.00
1.4
9
27
75
50
94
92
Jones Lang LaSalle
($179; JLL)
8,135
0.54
0.3
14
6
84
52
94
90
MAXIMUS
($69; MMS)
4,637
0.18
0.3
5
8
60
30
95
68
Minerals Tech.
($64; MTX)
2,236
0.20
0.3
26
4
94
90
87
96
Trinity Industries
($28; TRN)
4,267
0.44
1.6
30
10
87
98
97
100
S&P 500 (large-cap) stocks
Apple
($115; AAPL)
666,215
2.08
1.8
NA
24
94
82
98
99
Comcast
($60; CMCSa)
151,379
1.00
1.7
23
32
70
70
87
87
Gilead
($119; GILD)
182,736
1.72
1.4
NA
17
99
87
98
100
Goodyear Tire
($31; GT)
8,497
0.24
0.8
NA
8
80
94
92
99
Lam Research
($74; LRCX)
13,075
1.20
1.6
NA
24
83
72
79
93
Lincoln National
($56; LNC)
14,377
0.80
1.4
40
13
62
95
82
91
Skyworks
($89; SWKS)
17,383
1.04
1.2
NA
21
99
41
100
94
Southwest Airlines
($38; LUV)
25,500
0.30
0.8
121
11
70
84
97
96
Note: Quadrix scores are percentile ranks, with 100 the best.

Below we review three stocks that earn high ranks in Quadrix Overall and at least one of the key category scores for its size group:

Jones Lang LaSalle's ($179; JLL) low yield of 0.3% stems partly from its strong share-price appreciation. The stock managed a total return of 39% over the past 12 months, ranking it in the top 15% of our research universe. While the yield isn't high, Jones Lang consistently delivers strong dividend growth. Its semiannual dividend has increased at an annualized rate of 21% over the past five years and 14% over the past three. Management earmarks about 5% of its excess cash to its dividend. Fortunately for investors, that pot of excess cash is expanding. Operating cash flow grew 10% to $430 million in the 12 months ended June. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.


The 2008 financial meltdown gutted Lincoln National's ($56; LNC) quarterly dividend, which was just $0.01 per share as recently as late 2010. Through a series of big hikes over the last five years, increases ranging from 25% to 400%, Lincoln has rebuilt its quarterly distribution to $0.20 per share. Lincoln posted disappointing June-quarter results, hurt by an unexpectedly large number of mortality claims. But additional large dividend hikes should be in store for the company, a provider of annuities, life insurance, and retirement-planning services. The company pays out just 13% of earnings as dividends, well below the average of 21% for S&P 1500 life and health insurers. The stock now yields 1.4%, below its own average of 2.7% in the four years leading up to the financial crisis of 2008. Given its recent spate of dividend hikes and history of higher yields, Lincoln shouldn't be afraid to pump up the dividend volume. Lincoln is a Long-Term Buy.


MKS Instruments ($36; MKSI) pays only $0.02 per share more in dividends than it did when launched in 2011. But MKS operates in a highly volatile industry and can justify a conservative stance on dividend growth. The company primarily makes products used to deposit material onto silicon wafers and to etch and clean circuit patterns. MKS draws on semiconductor equipment and device makers for nearly 70% of sales. The semiconductor-equipment industry is expanding, and MKS has seen free cash flow improve in six of the past seven quarters. The company has built a fortress of a balance sheet, containing more than $6 per share in net cash, enough to backstop the dividend in case of a downturn. The stock earns an Overall rank of 96, supported by above-average Quadrix scores for all six categories. MKS, yielding 1.9%, is rated Buy in sister publication Upside.


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