Mining For Income

5/9/2016


Modern-day prospectors rely more on spreadsheets than picks or shovels, but the idea is the same. Find riches hidden amid the rubble.

Most income investors gauge the value of their treasures in one of two ways: Yield or dividend growth. Regular readers know we tend to favor growth over yield, but in this story we'll help you find both types of income stocks.

Compared to a generation ago, the search for income has become easier in at least one way: the ability to find dividends in a variety of places. Dividend-paying stocks in every sector average yields of at least 2.4%. This applies even among health-care and technology stocks, which are least likely to provide a payout. Only 24% of the 729 tech stocks in our research universe and 12% of the 719 health-care stocks pay dividends, but the stocks that do often provide solid yields.

INCOME COMPARISONS
At the moment, our research universe contains 2,301 stocks that pay dividends, slightly less than half of the stocks for which we calculate Quadrix scores. While small-cap dividend-payers average higher yields than midcaps or large-caps, the high-market-cap groups feature a larger selection of dividend payers and solid dividend growth; they also tend to pay out a somewhat smaller percentage of their earnings in dividends.
Group (Number Of
Dividend-Paying Stocks)
Avg.
Yield
(%)
Avg.
Payout
Ratio
(%)
Avg. 3-Yr.
Ann. Div.
Growth
(%)
Stock-market capitalization
Up to $1 bil. (871)
4.0
43
7
$1 bil. to $3 bil. (462)
3.4
39
11
$3 bil. to $10 bil. (458)
3.0
37
10
$10 bil. or above (504)
3.6
40
9
Quadrix scores
Overall above 80 (558)
3.0
32
16
Overall 80 or lower (1,743)
3.6
42
8
Index membership
S&P 1500 (993)
2.5
37
12
Rest of research univ. (1,308)
4.1
44
7

The top four sectors as measured by average yield are, in order: energy, telecom, utilities, and financials. Credit energy's high average yield to a relatively small number of extremely high-yielding master limited partnerships (MLPs), which carry their own specialized risks. For more on MLPs, visit www.DowTheory.com/Go/MLP.

Not surprisingly, telecom and utility stocks, long known for their yields, tend to provide little dividend growth. In fact, only two sectors that rank in the top half for average yield also rank in the top half for average three-year dividend growth — energy and financials.

We also looked at average yield and dividend growth for different groups of stocks, discovering two trends every investor should know:

1) Stocks with high Overall scores average slightly lower yields than other stocks, but deliver more than twice the dividend growth.

2) While tiny stocks average higher yields, they are far less likely to pay dividends than are the larger stocks found in the S&P 1500 Index, the pond in which we fish for our own recommendations. Those larger stocks also offer superior dividend growth.

The story below presents a portfolio that would pay dividends every month, while the table below lists stocks that offer both yield and dividend growth.


Dividends every month

In our effort to create a portfolio that pays dividends every month, we avoided stocks that don't pay on a regular quarterly schedule, as well as those with less than 3% annual dividend growth over the last three years, if they've paid for that long. We also screened out stocks that devote more than 65% of earnings to dividends, with the exception of one master limited partnership (MLP), for which earnings aren't the best measurement of operating results.

Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
5-Year
Annual.
Div.
Growth
(%)
Sector
Advice
Dividend paid January, April, July, and October
Cisco Systems
($26; CSCO)
1.04
3.9
45
24
Technology
A
Comcast ($61; CMCSa)
1.10
1.8
33
15
Consumer
discretionary
Focus Buy
Foot Locker ($62; FL)
1.10
1.8
26
23
Consumer
discretionary
Buy
Lam Research
($75; LRCX)
1.20
1.6
20
NA
Technology
Focus Buy
Portland General
($41; POR)
1.28
3.1
61
3
Utilities
Top 15
Scana ($71; SCG)
2.30
3.3
66
3
Utilities
Top 15
Spire ($66; SR) *
1.96
3.0
62
3
Utilities
Top 15
UGI ($41; UGI)
0.95
2.3
49
8
Utilities
Top 15
Dividend paid February, May, August, and November
American Express
($64; AXP)
1.16
1.8
22
12
Financials
A
Anthem ($139; ANTM)
2.63
1.9
25
27
Health care
A
Apple ($94; AAPL)
2.28
2.4
25
22
Technology
Focus Buy
CVS Health ($104; CVS)
1.70
1.6
33
27
Cons. staples
Buy
EQT Midstream
($77; EQM)
2.98
3.9
57
56
Energy
Top 15
Spectra Energy Part.
($48; SEP)
2.55
5.3
72
8
Energy
Top 15
Star Gas ($9; SGU)
0.41
4.7
44
6
Utilities
Top 15
Verizon Commun.
($51; VZ)
2.26
4.4
56
3
Telecom
services
A
Dividend paid March, June, September, and December
Alaska Air Group
($69; ALK)
1.10
1.6
16
NA
Industrials
Focus Buy
Ford Motor ($13; F)
0.60
4.5
28
50
Consumer
discretionary
A
General Motors ($31; GM)
1.52
5.0
28
NA
Consumer
discretionary
A
Gilead Sciences
($86; GILD)
1.88
2.2
15
NA
Health care
Focus Buy
Kroger ($35; KR)
0.42
1.2
20
17
Cons. staples
Buy
Robert Half In'tl
($39; RHI)
0.88
2.3
32
10
Industrials
Focus Buy
Skyworks Sol.
($65; SWKS)
1.04
1.6
18
NA
Technology
Buy
Wells Fargo ($49; WFC)
1.52
3.1
37
18
Financials
LT Buy 
Notes: All Buys and Focus Buys are also Long-Term Buys.     * Formerly Laclede Group.     NA Not available.

Get paid every month

We know many of you rely on the dividends from your stock portfolios to fund some or all of your living expenses. However, such a strategy can leave you stretched while you wait for the next payment. 

Most stocks pay four dividends a year, once each quarter. However, of the stocks in our coverage universe that paid a dividend in the first quarter, nearly half paid in March. As such, investors tend to receive a large chunk of their dividend payments late in the quarter, which could leave them light during the early months of the quarter. In addition, while most companies pay on a regular schedule, (January, April, July, October; February, May, August, November; or March, June, September, December), plenty are not that regular.

With the above scheduling issues in mind, we've assembled a portfolio of 24 stocks that yields a combined 2.8% and pays out no less than 8% of its dividends each month. To avoid concentration, we limited the portfolio to no more than 21% in a given sector. Many of the stocks come from our buy lists; the rest are rated A (above average) or are part of our Top 15 Utilities portfolio (www.DowTheory.com/Go/Top15).


Three of our favorites are reviewed below:

Technology giant Apple ($94; AAPL) may have disappointed investors by posting weaker-than-expected sales and profits in the March quarter, but at least its dividend action lived up to expectations. The quarterly dividend rose 10% to $0.57 per share, equating to a yield of 2.4%. Apple's payout has risen at least 10% every year since 2012, when the company started paying a dividend for the first time in nearly 17 years.

Apple, which holds $232.9 billion ($42 per share) in cash and marketable investments, didn't stop with the dividend hike, also boosting its share-repurchase program by $35 billion to $175 billion, enough to reduce the share count 34% at current prices. Given that Apple has proven its commitment by spending $163 billion on buybacks and dividends since August 2012, we expect the company to make good on its promises. Apple is a Focus List Buy and a Long-Term Buy.


Since Comcast ($61; CMCSa) restarted its quarterly dividend in 2008, the payout has risen at an annualized rate of 20%. The payout increased in each of the last eight calendar years, most recently a 10% boost in February. Comcast's indicated year-ahead dividend of $1.10 equates to just one-third of trailing earnings and a 1.8% yield.

Comcast's solid cash generation — operating cash flow up 5% over the last year and 10% annually over the last five — should provide fodder for continued growth in the payout. In the March quarter, Comcast added 53,000 video subscribers, its best first quarter in nine years; the reversal in video-subscriber trends boosts our confidence in future cash-flow generation. Comcast is a Focus List Buy and a Long-Term Buy.


Shoe and athletic-apparel retailer Foot Locker ($62; FL) has grown its per-share dividend at an annualized rate of 12% over the last decade, accelerating to 23% over the last three years. Even after that growth, the payout eats up barely a quarter of Foot Locker's operating earnings, leaving the company plenty of financial flexibility.

Despite the faddishness of shoe fashions, Foot Locker has run at an incredibly steady pace. Sales rose in 22 straight quarters, averaging nearly 8% growth during that period. Per-share profits managed double-digit growth in each of the last nine quarters and haven't posted a quarterly decline since 2010. The consensus calls for continued growth, with sales up 5% and per-share profits 11% over the next year. Despite that growth, Foot Locker trades at 13 times expected year-ahead profits, a 10% discount to the median apparel retailer. Foot Locker, yielding 1.8%, is a Buy and a Long-Term Buy.

YIELD AND GROWTH PLAYS
All 16 of the A-rated stocks below yield at least 1.5% and have grown their dividends at an annualized rate of at least 10% over the last three and 10 years, if they've paid that long. Payout ratios are low enough to suggest the companies can continue boosting the dividend. Stock on our recommended lists in bold.
Dividend Growth
-- (Annualized) --
-------------- Quadrix Scores --------------
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
3
Years
(%)
10
Years
(%)
Momen-
tum
Value
Fin'l
Str.
Overall
Sector
AbbVie ($61; ABBV)
2.28
3.7
51
74
NA
73
69
75
85
Health care
Amgen ($154; AMGN)
4.00
2.6
37
30
NA
87
62
84
91
Health care
Anthem ($139; ANTM)
2.63
1.9
25
27
NA
54
81
38
82
Health care
Apple ($94; AAPL)
2.28
2.4
25
22
NA
21
93
85
71
Technology
Cisco Systems
($26; CSCO)
1.04
3.9
45
24
NA
72
79
80
93
Technology
Comcast ($61; CMCSa)
1.10
1.8
33
15
NA
51
71
70
74
Cons. discretionary
CVS Health ($104; CVS)
1.70
1.6
33
27
26
75
55
42
73
Consumer staples
Foot Locker ($62; FL)
1.10
1.8
26
23
12
67
78
76
87
Cons. discretionary
Home Depot ($135; HD)
2.76
2.0
51
27
19
58
35
54
70
Cons. discretionary
Honeywell ($113; HON)
2.38
2.1
39
12
10
66
48
65
83
Industrials
Robert Half Int'l
($39; RHI)
0.88
2.3
32
10
11
60
93
55
85
Industrials
Target ($80; TGT)
2.24
2.8
48
18
20
63
72
47
84
Cons. discretionary
Time Warner ($75; TWX)
1.61
2.2
34
10
17
65
69
54
86
Cons. discretionary
Travelers ($110; TRV)
2.68
2.4
25
10
10
71
88
80
86
Financials
UnitedHealth Group
($132; UNH)
2.00
1.5
31
33
63
75
51
54
86
Health care
Walgreens Boots
($81; WBA)
1.44
1.8
34
12
19
55
57
51
65
Consumer staples
Notes: Quadrix scores are percentile ranks, with 100 the best.   The payout ratio measures the indicated year-ahead dividend as a percentage of earnings over the last 12 months.     NA Not available.

 


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