Get Monthly Income Plus Growth

10/12/2009


Many income-oriented investors begin and end their research with dividend yield.

But the siren song of super-high yields can sink a portfolio, as owners of former income darlings turned dividend-cutters, such as Citigroup ($5; C) and Bank of America ($17; BAC), can attest.

In the first nine months of 2009, stocks tracked by Standard & Poor’s have made 730 dividend cuts or omissions, versus 530 increases or initiations. Historically, dividend increases have tended to outnumber cuts by a wide margin. In 2005, 2006, and 2007, increases and initiations outstripped cuts or omissions by more than 22-to-1.

The average S&P 500 Index stock’s yield rose sharply last year but has since fallen to 1.9%. Higher stock prices account for much of the decline in yield, but dividend payouts for the index in the 12 months ended September are down 17% from year-ago levels.

However, even in this challenging environment, investors can stock a portfolio with companies poised to grow both their earnings and their dividends and still receive income every month.

Investors seeking income but not willing to sacrifice growth should look for stocks with the following characteristics:

Solid profit outlooks — In the long run, profit growth funds dividend growth. Investors looking to stash their cash in a stock capable of growing its dividend should consider the five-year growth estimate for per-share earnings — without taking such forecasts as gospel.

Moderate payout ratios — The payout ratio (indicated dividend divided by trailing earnings) helps show whether a company has sufficient cushion to continue the dividend — and even raise it — should profits dip. For example, Aflac ($43; AFL) has a 25% payout ratio, meaning the indicated year-ahead dividend represents just a quarter of the insurer’s earnings over the past year. We prefer to see payout ratios below 50%, which suggest companies have more leeway to deal with business slowdowns or continue paying dividends while still spending on operations, stock buybacks, capital investments, or acquisitions. Some stocks in relatively stable sectors like utilities can remain financially healthy and grow their dividends at payout ratios of more than 50%, but we generally avoid stocks with payout ratios of more than 75%.

Dividend-growth records — A company that regularly raises its dividend is likely to continue to do so in the future. But as the stock market has proved again and again in the past year, investors cannot put their faith in track records alone. Therefore, a steady dividend-growth history should be considered in concert with forward-looking metrics.

The table below shows a 24-stock portfolio that yields 2.8% and pays dividends every month. Three appealing selections from that portfolio are reviewed below.

In March 2008, Comcast ($15; CMCSA) reinstated its dividend, making its first quarterly payment in nine years. The cable TV giant hiked the dividend 8% this year, and consistently strong cash-flow growth — up 15% over the last 12 months and 23% annualized over the last three years — suggests Comcast should have the flexibility to continue raising the payout. Comcast’s estimated year-ahead dividend represents less than one-fourth of trailing 12-month earnings, and Wall Street expects annualized profit growth of 12% over the next five years. The shares have dipped on rumors of an acquisition (see report on page 6), but no deal has been announced. Comcast is a Focus List Buy and a Long-Term Buy.


General Dynamics ($66; GD) has paid a higher dividend in each of the last 14 years. Over the past five years, the dividend has climbed at an annualized rate of 17%. General Dynamics has grown per-share profits in each of the last 23 quarters, though the consensus projects a decline in the September quarter. However, profit estimates for 2010 call for 5% growth and are edging upward. Earning a Quadrix Overall score of 97, General Dynamics is a Buy and a Long-Term Buy.


Oneok ($36; OKE) operates a natural-gas utility but generates more than 80% of revenue from the production and marketing of natural gas. The company raised its dividend at an annualized rate of 16% over the last five years, including a 5% boost this year. Oneok pays a generous 4.6% yield. Unusually low natural-gas prices have weighed on results so far this year, but the consensus projects earnings will increase 34% in the December quarter and 9% in 2010. Oneok earns an A rating in the Utility Update and is a member of the Top 15 Utilities portfolio.

DIVIDENDS EVERY MONTH
A portfolio consisting of equal-weighted positions in the 24 stocks below would yield 2.8% and pay dividends every month. The portfolio is fairly well diversified, with no more than 21% of assets in any single sector.
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
P/E on
Next-
Yr. Est.
Est.
5-Yr.
EPS
Growth
(Annual.)
(%)
5-Yr.
Div.
Growth
(Annual.)
(%)
Quadrix
Overall
Score *
Sector
Advice
Dividends paid January, April, July, October
Auto. Data Processing ($39; ADP)
1.32
3.4
55
15
11
19
87
Technology
Neutral
Cardinal Health ($27; CAH)
0.70
2.6
20
13
10
36
78
Health Care
Neutral
Comcast ($15; CMCSA)
0.27
1.7
24
13
12
NM
96
Cons. Discret.
Focus Buy †
Medtronic ($36; MDT)
0.82
2.3
27
10
10
21
85
Health Care
Neutral
Oracle ($21; ORCL)
0.20
1.0
14
12
14
NM
84
Technology
Buy †
Southern Union ($21; SUG)
0.60
2.9
35
11
10
NM
75
Energy
Top 15 ‡
UGI ($25; UGI)
0.80
3.2
33
10
7
6
74
Utilities
Top 15 ‡
Wal-Mart Stores ($49; WMT)
1.09
2.2
32
13
12
18
76
Cons.Staples
LT Buy  
Dividends paid February, May, August, November
Abbott Laboratories ($50; ABT)
1.60
3.2
46
12
11
8
87
Health Care
Neutral
Colgate-Palmolive ($78; CL)
1.76
2.3
44
16
10
11
86
Cons. Staples
Neutral
CVS Caremark ($35; CVS)
0.31
0.9
12
12
13
19
85
Cons. Staples
Focus Buy †
General Dynamics ($66; GD)
1.52
2.3
24
10
8
17
97
Industrials
Buy †
General Mills ($65; GIS)
1.88
2.9
44
13
9
9
89
Cons. Staples
Neutral
Oneok ($36; OKE)
1.68
4.6
61
13
7
16
77
Utilities
Top 15 ‡
Procter & Gamble ($57; PG)
1.76
3.1
41
14
10
12
73
Cons. Staples
Neutral
Suburban Propane ($42; SPH)
3.30
7.8
62
11
8
6
90
Utilities
Upside Buy §
Dividends paid March, June, September, December
Aflac ($43; AFL)
1.12
2.6
25
8
13
24
95
Financials
Buy †
AmerisourceBergen ($22; ABC)
0.24
1.1
15
12
12
50
93
Health Care
Focus Buy †
Avista ($20; AVA)
0.84
4.1
56
12
9
8
80
Utilities
Top 15 ‡
DPL ($26; DPL)
1.14
4.4
56
10
10
10
78
Utilities
Top 15 ‡
IBM ($121; IBM)
2.20
1.8
24
11
9
25
91
Technology
Focus Buy †
Johnson & Johnson ($60; JNJ)
1.96
3.3
43
12
8
13
79
Health Care
Buy †
Microsoft ($25; MSFT)
0.52
2.1
31
13
10
26
73
Technology
LT Buy 
Sigma-Aldrich ($54; SIAL)
0.58
1.1
22
18
9
11
80
Materials
LT Buy 
Portfolio average
2.8
35
12
10
17
84
NM Not Meaningful because companies didn’t pay dividends five years ago.         * Quadrix scores are percentile ranks, with 100 the best.    
† Also qualifies as a Long-Term Buy.      ‡ Components of our Top 15 Utilities portfolio.      § Stock recommended by our sister newsletter, Upside, which focuses on small-cap stocks.

 

 


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