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5 Dividend Champs to Buy for 2013 - views
BALTIMORE (Stockpickr) -- Ask an income investor what the most important metric is when investing for income, and the answer is bound to be yield. Yield, the percentage of a stock’s share price paid out in dividend income, is a critical number, no doubt: It tells you how much you’re going to get paid. But the best dividend stocks aren’t always the names with the biggest yields.
In fact, some of the best dividend payers aren’t high-yield stocks at all -- they’re companies that pay out 1% or 2% a year in dividend income. Don’t follow? Allow me to explain.
A wise portfolio manager once told me years ago that you should never chase yield; a stock, after all, can far more in a single day than it yields in an entire year. And often, excessively high yields are a warning sign, inicating that a stock’s share price has been falling and that its payout is unsustainable.
So instead of chasing yield, we’re chasing the dividend champs today.
To fall into the group, a stock has to meet a couple of criteria. First, it’s got to pay a growing dividend that’s beat inflation over the last few years. Second, its share price has to have managed to keep its head above water over that same time period. While those criteria are pretty loose, only a handful of stocks made the cut.
I’ve said before that we’re in a toxic environment for investors. Interest rates are smashed as close to zero as they can get, while the Fed keeps its foot floored on the inflation accelerator pedal. With so many investors willing to take a penalty to jump into the safety of “risk free” assets such as treasuries, these dividend winners offer a much more attractive alternative.
They don’t just beat treasuries right now. Dividend payers historically beat all other stocks as well.
Over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, according to data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts.
That’s why we pay close attention to the firms that are shoveling more corporate cash to shareholders each week. With that, here’s a look at five dividend champs worth owning right now.
Choice Hotels International
Hotel franchiser Choice Hotels International (CHH) is one of the biggest hotel companies in the world, with around 8% of all hotel rooms in the U.S. affiliated with one of the firm’s brands. Choice owns names such as Comfort Inn, Quality, Clarion, Sleep Inn and Econo Lodge -- popular names for both business travelers and value-conscious consumers. Right now, Choice pays out a 1.9% dividend yield.
Choice is unique because it’s a pure franchisor of hotels. It handles the branding, marketing and hotel standards, while franchisees handle running properties. That means that, unlike most other hotel brands, Choice doesn’t encounter the huge risks and capital needs that surround owning and operating a property. For its trouble, Choice collects recurring franchise fees with extremely low fixed costs that allow the firm to adapt to economic hiccups much faster than a typical hotelier. Those recurring revenues are a stellar source of reliable dividend income for investors.
Because hotels incur huge costs for leaving the Choice network before their long-term contracts are up, Choice also has considerable stickiness in its nearly 6,200 hotels. Choice’s market positioning should serve it well in 2013 as travel spending continues to uptick; with a reputation for being clean and low-cost, Choice’s hotels own attractive mindshare for consumers right now. With a history of hiking dividends and a share price that’s rallying into 2013, investors could do worse than this dividend champ.
Garmin (GRMN) is sort of like the Energizer Bunny of stocks. Despite short-sellers’ hopes of a conspicuous tumble, Garmin keeps going and going. So while the firm’s short interest ratio currently sits at 9.1, its 5.14% dividend payout is eating away at those short-sellers’ returns. A history of rewarding shareholders in recent years shouldn’t be ignored in 2013.
Garmin is the leader in global positioning devices for cars, boats, planes and fitness enthusiasts. That exposure to all corners of the GPS market is significant. It means that Garmin is able to pour R&D into big-ticket electronics (such as the $50,000 G1000 avionics suite for business jets) and then transition the tech to the more margin-sensitive consumer market. It’s a strategy that’s kept Garmin’s offerings more interesting as rivals got squeezed in the highly competitive auto market.
To be clear, Garmin’s getting squeezed by the automotive GPS market too, but consumer demand for in-car navigation and entertainment certainly isn’t falling off. This firm’s superior tech should enable it to shove its way into the lucrative OEM market.
Financially, Garmin is a gem. The firm boasts no debt and around $2.8 billion in cash and investments. Those assets cover more than a third of Garmin’s market capitalization right now, erasing a big chunk of the risks associated with this stock. A history of strong cash flow generation gives Garmin more than enough wherewithal to fund its huge dividend payout this year.
Darden Restauratns (DRI) is another high-yield name that’s making our list of dividend champs. Right now, Darden pays out a 50-cent quarterly dividend that works out to a big 4.2% annual yield. Try getting that sort of return from treasuries right now.
Darden owns full-service casual restaurant chains such as Red Lobster, Olive Garden and LongHorn Steakhouse -- more than 2,000 North American locations in all. One key to DRI’s success has been its willingness to step into new dining concepts; the acquisition of higher-end Capital Grille and the new healthier Seasons 52 brand are two examples of how DRI isn’t just diversifying cuisine to achieve growth. And in spite of a business that’s wholly tied to the ebb and flow of consumer discretionary spending, Darden actually grew its revenues during the Great Recession.
International growth provides a big opportunity for Darden in the next few years -- and with minimal risk. The firm has penned franchise deals with operators in markets such as Latin America and the Middle East, and it’s actively seeking partners in other regions. The combination of brand exposure and cash inflows without the need to carry the capital burden or regulatory complications of international restaurants is very attractive indeed.
It’s been a fairly flat year for audio electronics maker Harman International (HAR), but as the broad market continues to push higher, a rising tide should help to spark buying in this mid-cap audio stock. Harman owns a deep portfolio of audio brands, including Harman Kardon, Infinity, JBL and AKG. While the firm’s 1.37% dividend yield is hardly worth writing home about, it’s dramatically outpaced inflation since being re-initiated in 2011.
Harman’s products are popular in everything from high-end home and car audio systems to professional concert installations. As luxury spending continues to stay strong in 2013, that’s panning out to strong performance for HAR’s income statement. Last year, the firm managed to eclipse its pre-recession highs in sales and profits, and this year, it’s on track for a repeat performance.
The premium pricing of Harman’s products also affords the firm the ability to earn reasonably high net profit margins in its business. As audiophiles continue to spend big bucks on listening gear (and help sell non-enthusiasts on high-end audio gear as well), that’s unlikely to change. Harman’s financials are in excellent shape, with a $300 million net cash position on its balance sheet. That gives the firm ample dry powder for another dividend hike down the road.
The past year has been stellar for shareholders in TJX (TJX). The stock has rallied more than 20% in the last 12 months, buoyed by that same consumer spending boost that’s pushed names like Darden and Harman higher. So even though TJX’s 1% dividend yield looks paltry by comparison, the total returns on this stock have been hard to beat.
So has TJX’s dividend growth. For shareholders who bought a couple of years ago, this stock’s cost yield is closer to 3%.
TJX, which owns chains such as T.J. Maxx, Marshall's and HomeGoods, is the biggest off-price retailer in the country. A big part of TJX's success comes from its positioning in between manufacturers and consumers. The firm is critical to apparel and housewares makers because it helps them clear out huge swaths of older inventory without having to discount their own sales channels. On the consumer side, TJX provides a way to get name brands at a substantial discount. By straddling those two groups, TJX can command pricing power on both sides and earn margins that most retailers would kill for.
Like the other names on this list, TJX sports a solid balance sheet: the firm boasts more than $2 billion in cash that’s offset by just $774 million in debt. I’ve said before that I think TJX is a likely candidate for a dividend hike in the near-term, and as its dividend catches up with its financial performance, investors should continue to benefit in a big way.
To see these dividend plays in action, check out the at Dividend Stocks for the Week portfolio on Stockpickr.
And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.