Dividends Are Everywhere

8/10/2010


For many, the phrase “dividend-paying stocks” inspires thoughts of financials and utilities, sectors known for high yields. However, those two sectors currently account for less than one-fifth of the cash dividends paid out by S&P 500 Index companies.

For stock investors seeking income, sectors not generally associated with dividends represent a rich hunting ground.

In the 12 months ended June, S&P 500 Index companies paid out $197 billion in dividends, down $25 billion from the year-ago period. Financial stocks accounted for almost all of that decline, with 61% of S&P 500 financials paying less over the last year than they did in the prior-year period.

Three years ago, the financial sector alone accounted for more than 26% of the S&P 500 Index’s dividends, versus a combined 44% for the consumer discretionary, energy, health care, industrial and technology sectors, Over the last 12 months, those five sectors accounted for 52% of dividends, while finance’s share has dropped to 10%.

It’s understandable many dividend-oriented investors don’t turn to health care and technology, as the stocks in both sectors of the S&P 500 average yields of less than 1%. But ignoring those “low-yield” sectors is foolish for two reasons:

First, averages can mislead. Yes, the average S&P 500 health-care stock yields 0.9%, while the average tech stock yields 0.7%. But fewer than 50% of those stocks pay dividends, which drags the averages down. The average dividend-paying health stock yields 2.1%, versus 1.8% for tech stocks.

Second, diversification is crucial. Shrewd investors spread their funds around numerous sectors to limit exposure to weakness in a particular sector.

Third, good stocks abound. By limiting yourself to “high-yield” sectors, you ignore sectors with strong Quadrix scores and excellent profit-growth potential. On average, health-care and technology stocks in the S&P 500 earn Quadrix Overall scores of more than 71. In contrast, financials and utilities average scores below the average of 62 for the entire index.

DIVERSIFIED DIVIDEND SELECTIONS
The A-rated stocks below yield at least 1% and pay out less than 60% of their earnings in dividends. The stocks hail from all 10 sectors, illustrating that it is possible to obtain yield from sectors not normally associated with dividends. Stocks on our buy lists are presented in bold.
Div. Growth
– (Annual.) –
——–— Quadrix Scores * ——–—
Company
(Price; Ticker)
Div.
($)
Yield
(%)
3
Yrs.
(%)
10
Yrs.
(%)
Value
Quality
Fin'l
Str.
Overall
Consumer Discretionary
Comcast
($19; CMCSa)
0.38
2.0
NM
NM
78
78
70
89
McDonald’s
($70; MCD)
2.20
3.1
14
26
45
90
72
69
Ross Stores
($52; ROST)
0.64
1.2
29
24
79
97
81
98
Target ($51; TGT)
1.00
2.0
7
12
83
79
45
82
TJX Companies
($41; TJX)
0.60
1.5
10
20
83
95
72
98
Consumer Staples
Coca-Cola
($56; KO)
1.76
3.1
9
10
44
83
89
69
PepsiCo
($66; PEP)
1.92
2.9
9
13
49
85
64
68
Wal-Mart Stores
($51; WMT)
1.21
2.4
11
18
77
79
44
58
Energy
Chevron
($79; CVX)
2.88
3.7
7
8
94
73
58
97
Financials
Aflac ($50; AFL)
1.12
2.2
11
21
93
85
48
98
Travelers
($50; TRV)
1.44
2.9
7
3
93
74
80
86
Health Care
Abbott Labs
($50; ABT)
1.76
3.5
11
9
82
81
73
81
Amerisource
($30; ABC)
0.32
1.1
17
NM
71
85
24
83
McKesson
($62; MCK)
0.72
1.2
44
12
81
79
34
79
Stryker
($48; SYK)
0.60
1.3
22
31
74
92
84
76
Industrials
3M ($87; MMM)
2.10
2.4
3
6
52
80
83
89
CSX ($54; CSX)
0.96
1.8
17
5
68
83
78
94
Materials
Freeport-McMo.
($74; FCX)
1.20
1.6
(22)
NM
92
84
81
88
Lubrizol
($96; LZ)
1.44
1.5
6
3
82
94
58
98
Sigma-Aldrich
($57; SIAL)
0.64
1.1
12
15
40
88
91
65
Technology
IBM ($130; IBM)
2.60
2.0
18
17
73
90
81
89
Intel ($21; INTC)
0.63
3.0
12
23
92
91
94
100
Microsoft
($26; MSFT)
0.52
2.0
6
NM
83
88
90
97
Texas Instruments
($25; TXN)
0.48
1.9
6
19
86
90
97
100
Telecom Services
Rogers Commun.
($35; RCI) e
1.16
3.3
36
NM
86
99
64
98
Utilities
Energen
($45; EGN)
0.52
1.2
4
4
87
72
81
79
NM Not Meaningful because the company didn’t pay a dividend in the earlier period.     * Quadrix scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

The table above presents at least one income selection from each of the 10 market sectors. The stocks don’t pay the highest yields, but in our opinion they offer superior total-return potential, with yields of at least 1% augmenting what we expect to be solid capital gains. Three of the stocks are reviewed below:

What AmerisourceBergen’s ($30; ABC) dividend lacks in history, it makes up for in growth. Initiated in 2001, the per-share dividend has risen at a 17% annual pace over the last three years. A 15% payout ratio is modest but exceeds the average of 10.5% for S&P 500 health stocks. The payout ratio represents the indicated dividend as a percentage of trailing earnings.

The S&P 500 Health Care Sector Index has slumped 6% this year, versus a slight gain for the broader index. Amerisource, up 15% in 2010, has outperformed, helped by the drug distributor’s niche in specialty and generic treatments.

But the stock turned lower after Amerisource issued somewhat disappointing guidance for the September quarter. The company also introduced a profit outlook for fiscal 2011 ending September that modestly exceeded Wall Street expectations. Important generic-drug launches should drive growth in the coming year. Trading at 12 times estimated per-share earnings for the next 12 months, Amerisource is a Focus List Buy and a Long-Term Buy .


Microsoft ($26; MSFT) returns about a quarter of its earnings to investors through dividends. The software giant’s stock yields 2.0%, above the 1.8% average for dividend-paying technology stocks. Microsoft generated $24 billion in operating cash flow in fiscal 2010 ended June, of which $16 billion returned to investors in the form of dividends and buybacks.

Microsoft has not raised its dividend since 2008. But the balance sheet, with $31.85 billion in cash net of long-term debt, hints at more growth ahead. Free cash flow, rising at an annualized rate of 17% over the last four years, jumped 57% in the six months ended June.

Earnings estimates for fiscal 2011 ending June are on the rise, with the consensus now projecting profits of $2.37 per share, up 13%. Yet shares trade at less than 13 times trailing earnings, 30% off the five-year average P/E ratio. Earning a Quadrix® Overall rank of 97, Long-Term Buy Microsoft is being added to the Buy List.


Ross Stores ($52; ROST) has raised its dividend at a 24% annual clip over the last 10 years, more than three times its sector’s median growth rate. The latest hike, a 45% bump in January, marked 16 straight years of increases. Ross is also chewing through a $750 million share-buyback program.

Combined spending on dividends and buybacks should reach $450 million this year, up 92% from 2006 expenditures. The dividend-growth and buyback activity reflects the discounter’s success at generating cash. In the past decade, free cash flow rose at an annualized rate of 21%, accelerating in the last two years.

Weakness in the labor market will likely continue to pressure consumer spending. But in hard times more consumers are more likely to turn to Ross’s two chains of discount stores for popular clothing brands and home accessories. Expected to grow per-share profits by 19% in fiscal 2011 ending January, Ross is a Focus List Buy and a Long-Term Buy.

SECTOR ANALYSIS
While about 73% of S&P 500 stocks pay a dividend, in four of the 10 sectors — consumer staples, industrials, materials, and utilities — more than 90% pay a dividend. The discrepancy between sector average yields is due partly to the large number of stocks with no yields. Excluding non-dividend-payers, six of the 10 market sectors average yields between 1.8% and 2.2%, suggesting that decent yields are available everywhere.
—— Dividend Yield ——
Median
Div. Growth
— (Annualized) —
——— Average Quadrix Scores ———
Sector (No. of Companies)
Total
Dividends
($Billions)
% Of
Stocks
Paying
Dividends
(%)
Average
Company
(%)
Avg. Div.-
Paying
Company
(%)
Average
Payout Ratio
(%)
3
Years
(%)
10
Years
(%)
Value
Quality
Fin'l
Str.
Overall
Cons. Discret. (81)
15.3
70
1.3
1.8
23.3
2
7
63
64
54
67
Cons. Staples (41)
37.0
93
2.6
2.8
37.9
8
9
60
68
54
59
Energy (39)
24.7
79
1.1
1.4
27.2
4
8
60
62
62
56
Financials (80)
19.7
85
1.7
2.0
33.2
(12)
(4)
57
46
53
54
Health Care (51)
24.8
43
0.9
2.1
10.5
5
6
74
75
66
72
Industrials (56)
23.2
95
1.9
2.0
38.4
8
7
53
65
55
60
Materials (32)
6.5
91
1.7
1.8
31.1
1
2
53
58
46
57
Technology (76)
18.9
41
0.7
1.8
13.8
4
15
56
72
74
71
Telecom Services (9)
17.2
67
4.4
7.0
57.8
2
4
68
53
58
61
Utilities (35)
15.9
94
4.2
4.5
56.9
3
2
74
52
49
59
S&P 500 Index (500)
203.2
74
1.7
2.3

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com