Two-Way Dividend Stars

6/21/2010


The hockey season has ended, and the basketball playoffs will be decided by the time this newsletter ends up in your mailbox. But like team general managers who begin planning for next year’s campaign just days after the final game of the season, there is no offseason for income investors.

If you depend on income from your stocks, you should consider when that income is paid. The table below lists a roster of standout dividend-paying stocks, all of which pay quarterly, though not at the same time. By recruiting stocks from each of the three payment schedules, (January-April-July-October, February-May-August-November, and March-June-September-December), investors can get a piece of the dividend action every month of the year.

GET DIVIDENDS EVERY MONTH
The portfolio below yields 2.1% and pays dividends every month. Given their history of profit and dividend expansion and solid growth potential, the stocks in this portfolio should continue to raise their dividends.
5-Year Annualized
—–— Growth —–—
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
Div.
(%)
Sales
(%)
EPS
(%)
Sector
Dividends paid January, April, July, October
Baxter Int’l
($42; BAX)
1.16
2.7
29
13
6
17
Health Care
Raytheon
($53; RTN)
1.50
2.8
24
9
5
23
Industrials
Rogers Comm.
($37; RCI) e
1.18
3.2
46
92
19
NM
Telecom
Stryker
($52; SYK)
0.60
1.2
20
23
9
15
Health Care
Dividends paid February, May, August, November
General Mills
($38; GIS)
0.98
2.6
36
9
6
12
Cons. Staples
Abbott Labs
($48; ABT)
1.76
3.7
42
9
9
10
Health Care
Oracle
($23; ORCL)
0.20
0.9
17
NM
17
16
Technology
CVS Caremark
($32; CVS)
0.35
1.1
14
18
25
18
Cons. Staples
Dividends paid March, June, September, December
IBM ($130; IBM)
2.60
2.0
22
25
0
17
Technology
Aflac ($44; AFL)
1.12
2.5
34
23
6
7
Financials
Amerisource
($32; ABC)
0.32
1.0
16
61
7
19
Health Care
TJX ($47; TJX)
0.60
1.3
15
22
7
19
Cons. Discretionary
Portfolio Average
2.1
26
28
10
16
NM Not Meaningful because company generated an operating loss or didn't pay a dividend in the earlier period.     e Dividend and yield estimated.

These two-way dividend stars feature a blend of strong offensive and defensive traits. Most have achieved dividend growth of 9% or higher over last five years. Yet those dividends are sustainable, as the companies distribute less than 50% of their income to shareholders. Such low payout ratios, coupled with solid sales and profit growth, suggest the companies have the flexibility to keep paying — and raising — their dividends.

We profile two intriguing dividend growers below.

AmerisourceBergen ($32; ABC) distributes pharmaceuticals and other medical products to retail and institutional customers. Its quarterly dividend, launched in 2001, has grown at a 61% annual clip over the last five years. Solid operating momentum supports that payout — earnings per share rose 19% and sales 7% during that same stretch. Over the last three years, Amerisource has cut its share count by 25%, and it is currently chewing through a $500 million stock-repurchase program.

Typical of its industry, Amerisource has razor-thin operating margins, with operating profits representing just 1.5% of sales over the last 12 months, up from 1.4% in the same period a year earlier. Free cash flow increased in four of the last five quarters, a positive harbinger for dividend hikes. Analysts forecast 24% higher per-share earnings on 8% sales growth in fiscal 2010 ending September. Amerisource is a Focus List Buy and a Long-Term Buy.


CVS Caremark’s ($32; CVS) dividend is keeping pace with per-share earnings — both rose at an annualized rate of 18% over the last five years. The annual dividend has risen in each of the last seven years. Management says it expects CVS to generate “significantly” more free cash flow in the next five years and has pledged to use it to “enhance shareholder returns.” In other words, expect further dividend growth.

The shares have stumbled since early June, hurt by uncertainty over the unraveling of a partnership between CVS’ pharmacy benefit-management (PBM) unit and drugstore chain Walgreen ($30; WAG). But the selling seems overdone. CVS shares trade at just 11 times estimated year-ahead earnings, 21% below the five-year average forward P/E ratio. CVS can rely on steady growth from the retail business as the PBM finds its legs. Even the most pessimistic analyst projects 5% higher per-share earnings this year, and the consensus calls for five-year annualized profit growth of 12%. Earning a Quadrix® Value score of 88, CVS Caremark is a Focus List Buy and a Long-Term Buy.


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