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7 Dividend Stocks Boosting Shareholder Returns - 12041 views
BALTIMORE (Stockpickr) -- The number of companies increasing their dividend payouts may have dropped recently -- 20 firms made payout hike announcements during the May 16 to May 20 period, vs. a staggering 33 firms in the previous week -- but dividend stocks are definitely not looking less strong as we head into June. That’s thanks in large part to the outperformance that the S&P 500’s dividend aristocrats are seeing right now.
According to research from Bloomberg, dividend aristocrats, the firms that have raised dividends for at least 25 years, have been handily beating the S&P since the beginning of the year. That shouldn’t come as a huge surprise. With languishing stock prices amid the sideways-swaying market right now, companies that actually force returns by paying out cash to shareholders are bound to outperform.
Right now, with the end of QE2 around the corner and liquidity expected to flee the market in June, dividend stocks could find themselves in high demand. Of course, I’m not just talking about dividend checks -- dividend-payers have historically stomped the market on an absolute return basis as well.
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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.
Each week, we take a look at the stocks that are hiking their payouts. Here's a look at some of several stocks from our list of recent dividend-increasers.
Household products giant Clorox (CL) has long been a core holding for income investors, but its recent dividend hike has certainly increased the incentives for dividend-seekers. The firm raised its dividend by 9.1%, bringing its quarterly payout to 60 cents per share -- a 3.5% dividend yield at current prices.
Clorox is one of the biggest household product firms in the world, with a handful of market-leading brands under its belt and thick net margins. Those margins should come in handy as inflation concerns creep into most competitors’ income statements. While rising commodity costs are sure to be unpleasant at Clorox, they’ll be worse for peers.
For Clorox, the size of the payout is only part of the equation. Another part is the firm’s incomparable blue-chip status -- that is to say, the certainty surrounding Clorox’s ability to continue paying out a dividend to shareholders in the future. With a solid balance sheet and massive cash flow generation abilities, this century-old stock is in very little danger of having to slash shareholder rewards to stay afloat.
Clorox, one of the top-yielding consumer durables stocks, is one of Carl Icahn's top holdings after Icahn Capital Management initiated a new 10 million-share position in the stock in the first quarter.
Dr Pepper Snapple Group
Dr Pepper Snapple Group (DPS), one of TheStreet Ratings' top-rated beverage stocks, has already been a strong performer so far in 2011, delivering gains of 18.2% year-to-date, vs. 5.4% from the S&P. Of course, those returns don’t count the company’s dividend payouts, which weigh in at a quarterly 32 cents per share after a recent 28% dividend increase.
As one of the large, vertically integrated nonalcoholic beverage companies in North America, Dr Pepper Snapple is subject to some stiff competition from league leaders Coca-Cola (KO) and PepsiCo (PEP). Even so, the firm’s strong brand performance has carved a reasonable economic moat out for shareholders. Because Dr Pepper Snapple’s manufacturing, bottling and distribution operations are better integrated than its larger peers', the company is able to be very competitive through impressive efficiency.
Because taste is so central to Dr Pepper Snapple’s ability to move its offerings, emerging-market growth may prove more challenging for the firm than it is at already-entrenched competitors like Coke and Pepsi. That said, with innovation keeping the growth engine churning stateside, don’t expect a slowdown just yet. A recession resistant business and attractive fundamentals make this a worthwhile holding in 2011.
Luxury apparel and accessory brand Coach (COH), one of George Soros' top holdings, may have been the success story of the recession, but the company’s continued success in still-uncertain times make it worth a second look right now. Already an established luxury brand, Coach reacted to recessionary headwinds by trimming prices and positioning itself to aspirational middle-class consumers, a move that sparked substantial growth even as consumer spending was crashing elsewhere.
Now the company is looking to do much the same thing with China, tapping a burgeoning middle class demographic that’s in search of Western symbols of success. And with luxury spending continuing to strengthen in the U.S. despite the inflation-induced consumer spending cuts being seen at the lower strata of the income distribution, don’t think that this shift to emerging markets is a trade. Instead, it’s a complement to the already impressive growth that the firm has made here.
To be sure, the transition from the high-end of the luxury apparel spectrum to the upper-mid end has bee a major balancing act for Coach. The company needs to make sure that it’s pricing its products well enough to generate sales, while ensuring that it’s not cheapening its brand image with consumers. Thus far, management has done an excellent job. For investors, a 50% dividend hike brings Coach’s quarterly payout to 22.5 cents per share.
Coach shows up on a recent list of 5 Stocks With Too Much Japan Exposure.
Another play on the luxury product market is storied name Tiffany (TIF), one of TheStreet Ratings' top-rated specialty retail stocks, which announced a 16% dividend increase recently. While Tiffany may carry many similarities to Coach on the surface, its positioning stands in stark contrast to the apparel stock. Even though Tiffany worked on its pricing in the wake of 2008, its big-ticket jewelry items remain much more aspirational than Coach’s.
At the same time, the luxury-spending spree that consumers undertook in 2009 is largely misleading for Tiffany’s results; investors shouldn’t be fooled into thinking that the company can sustain a similar rate of growth.
One advantage that Tiffany does have is one of the strongest brands in the jewelry business. That brand prowess gives Tiffany significant pricing power, but management has been reticent to actually target middle-class consumers either at home or abroad.
While Tiffany’s small yield doesn’t qualify it as a traditional dividend stock, investors shouldn’t discount the untapped potential that exists in shares if management is eventually able to wring out more mainstream sales.
As the largest money transfer firm in the world, Western Union (WU) has certainly benefited from the increased liquidity that’s greased the economic wheels in the last couple of years. International transfers (largely from immigrants sending money home) have long been Western Union’s bread and butter, but competitiveness in this relatively low-margin space has proven challenging -- especially with the high cost of compliance with regulatory rules.
Ultimately, though, increased regulation (designed to prevent illegal money transfers) could help pare down the field of competition for money transfers, boosting Western Union’s top line. So could growth through acquisitions, which looks like Western Union’s most attainable path to increasing its performance.
Investors should be pleased about management’s latest decision to increase its dividend payout, a 14.3% increase that brings its total quarterly payout to 8 cents per share. That said, a 1.57% yield is just gravy for those who like WU’s business already; this is hardly an income play.
The grocery business has been seeing increasing relative strength of late, a welcome trend given the risks that inflation are posing to these firms’ paper-thin margins. $8.7 billion grocery chain Safeway (SWY), one of TheStreet Ratings'
top-rated food and staples stocks, is still one of the best options for grocery stock investors. Now yet another dividend increase has brought Safeway’s total payout to 14.5 cents per quarter, a 2.37% yield.
There are a lot of factors that make Safeway a best-in-breed grocery stock. With a solid geographic footprint that spans much of the U.S. and Canada, Safeway benefits from diversification away from excessive exposure to any single region. At the same time, Safeway has been a pioneer in the concepts of private label brands and so-called “Lifestyle” store upgrades that cater to a higher-end customer. Those two changes should be a big source of margin growth for Safeway, which operates in an industry where margin cushion is paramount.
With solid balance sheet health and very large free cash flow generation abilities, Safeway’s management has traditionally been proactive about returning value to shareholders even when markets are lagging. Historically, they’ve done that through a combination of dividends, special dividends, and share buybacks – as long as that trend continues, long-term investors should be able to wait out increasing product costs.
Daniel Loeb's Third Point initiated a 1.9 million-share position in Safeway in the first quarter.
Even though electric and gas utility Xcel Energy (XEL), one of TheStreet Ratings' top-rated multi-utilities stocks, has merely moved in step with the broad market thus far in 2011, the firm’s investors are still enjoying market-beating returns right now thanks to a hefty dividend payout. This past week, the company announced a 3% increase that brings its total yield to 4.2% given current share prices.
While Xcel’s dividend increase was one of the smallest of the week, consistency is key. The firm has increased its dividend by a similar percentage each year since 2003, a decision that, in the aggregate, pans out to a sizable improvement in shareholder returns. Like most utilities, Xcel enjoys a high level of recession resistance and a high level of predictable cash flows. As such, investors should expect this $12 billion income holding to continue to pay off for the foreseeable future.
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, author 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.