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BALTIMORE (Stockpickr) -- For the last several months, we’ve focused on poor performance in the stock market as a reason why cash is flowing into dividend-payers right now. With capital gains in question for 2011, investors are opting for cold-hard cash payouts from companies instead. But most investors probably don’t realize just how at odds these two investment strategies are.
As of this writing, more than six months into 2011, the S&P 500 is sitting on gains of 0.75%. On a historical basis, that’s miserable performance for a full half-year. With dividends factored in, though, that year-to-date performance for the S&P climbs to 1.71% -- and taking out nonpayers (by looking at the S&P Dividend Aristocrat Index, for instance) that number climbs to 3.27%. That’s a massively improved 7.35% on an annualized basis.
Clearly, dividend stocks are substantially outperforming the rest of the market right now.
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And statistically speaking, we’ve long known that to be the case. Over the last 36 years, dividend stocks 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 a study from NDR. The numbers are even more compelling when looking at companies that consistently increase their payouts.
That’s why each week, we take a look at the stocks that declared dividend increases the previous week. Here's a look at some of several stocks from our list of recent dividend-increasers.
Shares of medical device maker C.R. Bard (BCR), one of TheStreet Ratings' top-rated health care equipment stocks, have enjoyed strong performance in 2011, with double-digit gains buoyed by positive relative strength readings in the healthcare sector as a whole. That number is increasing as well -- recently, management announced a 5.6% dividend increase that brings Bard’s total quarterly payout to 19 cents per share.
Auspicious as C.R. Bard’s dividend hike may be, a dividend yield of 0.7% hardly qualifies this stock as a core income play. That said, with health care names continuing to churn out performance, it’s a name worth considering in this environment. C.R. Bard has carved out a nice market position as a supplier of niche medical devices, with market-leading offerings for the obesity, urology, and oncology practices.
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Disposables make up a significant portion of revenues for C.R. Bard, making a good case for recurring, recession-resistant sales numbers. Financially, the company is well-positioned to keep its payouts rising; the firm held more than $745 million in cash as of its most recent quarter.
C.R. Bard is one of the top holdings of Donald Yacktman's Yacktman Asset Management, with a 2.4 million-share position as of the most recently reported quarter.
With enormous exposure to the construction industry, heavy equipment maker Caterpiller (CAT) was one of the hardest-hit during the depths of the recession. Now, with sales numbers coming back to normal, the company is seeing increased investor interest. As CAT expands its reach abroad, investors shouldn’t be ignoring this stock.
Even though construction continues to be soft domestically, growth is still considerable in emerging market economies such as India and China, where resource-driven wealth and rising commodity costs are increasing the need for heavy equipment. While competition is significant in these markets, Caterpillar’s iconic status, dealer network, and utility of offerings means that the firm started off in an enviable position to begin with.
Consistent uninterrupted dividends throughout the recession were management’s way of making it clear that the short-term economic issues facing sales weren’t impacting CAT’s long-term fundamentals. Last week, the firm announced a 4.5% increase that brings its payout to a quarterly 46 cents per share.
While top competitor United Parcel Service (UPS) has provided stiff competition in the ground shipping business, FedEx (FDX) still remains league-leader in express delivery, with more than half of revenues coming from customers who need to ship materials quickly. That’s not to say that FedEx is a one-trick pony; the company is still a massive presence in ground and freight shipping, as well as small business services.
The question is whether this stock’s recent 8.3% dividend hike warrants a second look right now.
While FedEx’s exposure to the express business traditionally means higher dollar volume (and margins) per unit, rising fuel costs have seriously squeezed margins on transportation costs, a big concern given the company’s massive aircraft fleet. While that’s a big concern (and one that gives UPS a minor advantage), it’s offset somewhat by the firm’s pricing power and large network investments in markets like China.
Current shareholders will appreciate the dividend hike, but an unwieldy balance sheet and potential for earnings drag make it a better choice for a more predictable market.
$32 billion retail stock Target (TGT) is another name that saw an increased dividend declared recently. Management announced a 20% increase to the company’s payout, hiking it to 30 cents per share. That puts the company’s total yield at 2.57% given current share prices.
Target has done a good job of defining, then focusing on, its core demographic shoppers: the 44-year old woman who makes $54,000 per year. While that definition may seem overly narrow, honing in on the customers that make up the majority of the 1,750 store chain’s revenues has had a palpable impact on growth in recent years.
In the past, a big part of that growth has come from fashionable apparel and housewares offerings. Now the company is hoping that its concerted foray into fresh food products will help it capture some of the one-stop shopper crowd.
While debt numbers are high, Target generates substantial free cash flow, and has a solid record of dividend increases in the last several years. With economic tailwinds being underplayed by Wall Street right now, this stock looks like a solid core income holding.
National Fuel Gas
As an integrated natural gas utility, National Fuel Gas Company (NFG) operates in every step along the way from exploration to distribution of natural gas for 725,000 customers in New York and Pennsylvania. From a dividend standpoint, this is a standout stock. Management has paid a dividend for 108 years in a row, the last 40 of which have been increases. This year’s no different. Last week, management announced a 2.9% increase in shareholder payouts, raising its distributions to a quarterly 35.5 cents per share.
Obviously, the integrated nature of NFG’s business adds considerable risk over what would be expected from a traditional gas utility. But that risk comes with considerable reward, a factor that will likely be perking up investors’ interest in this market. As more widely used alternative fuel sources continue to increase in price, languishing natural gas prices are likely to see some buoyancy.
At the same time, the company’s hefty exposure to the pipeline and distribution business cut down that risk when commodity prices are getting knocked around.
While major rallies in the last year have made NFG only a marginal yielder, this could be a good way to get added commodity exposure that pays income.
Document management giant Iron Mountain (IRM), one of the top-yielding computer software and services stocks, has long been the league leader in its field, with more than 120,000 global customers, and thousands of facilities. The company provides a bevy of services to its clients, though the lion’s share of revenue is generated through shredding or offsite storage of physical documents.
Because companies are often mandated to store records for considerable lengths of time, Iron Mountain enjoys a massive recurring revenue stream that helps finance the firm’s dividends and debt paydowns with limited cyclical exposure. That’s a very attractive attribute for investors.
While digital document management does pose some risk to IRM’s core business, the firm’s early offerings in the field should help mitigate risks posed. That said, physical document needs are unlikely to be quelled in the foreseeable future -- as such, expect IRM’s revenue streams should keep flowing.
Expect dividends to keep flowing in kind. Last week, management declared a 33.3% payout increase for shareholders, bringing its yield to 3.12% at current share prices.
In the first quarter, Chris Davis' Davis Selected Advisers increased its position in Iron Mountain to 42.2 million shares.
For the rest of this week’s dividend stocks, check out the 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, Elmerraji had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.