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BALTIMORE (Stockpickr) -- How’s your portfolio paying out right now? If Mr. Market’s any indication, the answer should be better than ever.
Dividend stocks hit a major milestone this week: The cash payouts of the S&P 500 are officially higher than they’ve ever been befor,e according to research from S&P’s Howard Silverblatt. Thanks to a slew of dividend hikes at banks in the last week, the broad market index pays out $29.02 per index share -- besting the 2008 record of $28.96.
And there’s plenty of reason to believe that those dividend payouts could keep climbing.
Right now, S&P 500 constituents are only paying out 30% of their incomes, compared to the historical average of 52%. With corporate profits sitting at all-time highs, that means that there’s still a lot more room for upside in dividend payouts. And even though stocks are rallying hard in 2012, investors would be wise not to ignore them; it may seem surprising, but historically, dividend payers have made up the majority of market returns.
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 seven of the stocks that hiked payouts in the last week.
The biggest name to ratchet its dividend payouts higher in the last week is JPMorgan Chase (JPM), the $170 billion banking firm that holds the distinction of being the biggest bank in the world by assets and market capitalization. JPM announced a 20% dividend increase on Tuesday, bringing the firm’s payout to 30 cents per share -- that’s a 2.68% yield at current price levels.
JPMorgan was one of the better “big banks” during the financial crisis, absorbing storied names like Washington Mutual and Bear Stearns in the process. Those acquisitions dramatically increased JPM’s scale without the liability repercussions that some peers are dealing with now.
At the same time, the firm out-earned rival banks during the crisis, enabling it to become one of the first banks to repay TARP and start paying investors a dividend. That track record means something to Wall Street.
In banking, scale comes with some significant advantages -- especially now. Scale attracts cheap deposit bases, which JPM can turn around and lend for better returns that most. That size advantage also means that the firm has a massive customer rolodex to flip through when looking to sell complementary financial services with almost no customer acquisition costs.
For income investors looking for financial sector exposure, JPM offers a relatively safe payout for 2012.
With a market capitalization of $60 billion, U.S. Bancorp (USB) tips the scales on the big end of the regional banking spectrum. While this firm isn’t in the “big four” category, it’s still a huge financial services firm -- one that boasts the type of net margins that only regionals have been raking in for the last few years.
And it’s sharing that profitability with shareholders right now. On Tuesday, the firm announced a 56% dividend hike that brings its payout to 19 cents per share. That’s a 2.5% yield.
Lately, USB’s claim to fame has been fees. The firm has put a lot of effort into growing its fee-based wealth management and trust businesses, operations that throw off recurring revenues and boast stickier customer bases than traditional banking models. While retail and commercial banking is still the lion’s share of USB’s operations, fee-based revenues have been an attractive growth engine in the last couple of years.
Financially, USB is in solid shape, with ample capital to cover unexpected loan losses. Back in October, I called this stock one of four that I would actually recommend buying. Since then shares have rallied 27%.
Here in March, this stock still looks like a best-in-breed for the financial sector.
State Street (STT) is another banking name that announced a dividend increase this week. The firm hiked its quarterly dividend payout by 33% on Wednesday, to 24 cents per share.
State Street isn’t your typical bank -- and that’s exactly what’s attractive about it. The firm is one of the largest trust banks in the world. That means that the firm’s focus is on asset management, custody and administration rather than retail or commercial banking. As a result, the majority of State Street’s revenues come from the same kind of fee-based sources that make U.S. Bancorp so attractive right now.
ETF sponsorship is one of STT’s biggest tailwinds right now. As investors get drawn to the exposure, tax and fee advantages of exchange-traded funds, this firm’s offerings should shine.
The firm is in reasonably strong financial shape right now, after shoring up its balance sheet and raising capital in the wake of the financial crisis. Even though STT is the league leader in fee-based financial services, its execution isn’t as attractive as that of USB.
Neither is its dividend payout. I’d suggest that income investors look at more attractive alternatives before this name.
Air Products & Chemicals
Industrial gas supplier Air Products & Chemicals (APD) is the largest provider of hydrogen and helium in the world. Gasses are a mission-critical niche for many companies that put suppliers such as Air Products in an attractive position; since gasses make up an insignificant element of costs but serve a critical role, customers are relatively immune to cost increases that may arise.
And because Air Products boasts a huge size advantage (the firm owns around 40% of global hydrogen capacity, for instance), the firm is able to generate deep and consistent net margins.
In many ways, industrial gas suppliers are a lot like utilities. They’re commodity-centric, they sign very long-term contracts with customers (ensuring stickiness and consistent sales), and they operate in a concentrated market. While gas firms have a lot more in the way of cyclical risk than traditional power and nat gas utilities, the upside is stronger when the industrial sector is experiencing boom times.
Like any good utility, Air Products also pays out a hefty dividend. Last yesterday, the firm announced a 10.34% dividend hike, bringing its quarterly payout to 64 cents per share. That’s a 2.8% dividend payout at current price levels, making Air Products one of the top-yielding chemicals stocks.
Air Products also shows up on a list of Merrill Lynch's 10 Favorite Stocks for 2012.
Cliffs Natural Resources
The award for biggest dividend increaser of the week goes to iron ore producer Cliffs Natural Resources (CLF) -- the firm announced a 123.2% increase to its quarterly payout on Tuesday. The raise brings Cliffs’ payout to a quarterly 62 cents per share, making the stock a 3.47% yielder.
Cliffs is the biggest iron ore producer on the continent, capable of supplying nearly half of North America’s blast furnace demand. Scale isn’t a big benefit for iron miners. Instead, firms such as Cliffs live and die by commodity prices and cost alone.
And with iron prices high and the firm’s cost structure skewed toward the low side of the spectrum, the firm has been able to generate net margins of around 25% for the last couple of years. With global demand for iron remaining strong (thanks to consumers like China), there’s a nice tailwind blowing at the firm’s back in 2012.
Financially, Cliffs is in reasonable shape, with approximately $1 billion in cash and investments offsetting a $3.6 billion debt position. The firm’s operations throw off a lot of cash – plenty to cover dividend payouts even after CLF doubled its payout. Investors looking for base metals commodity exposure could do worse than this stock right now.
Xilinx (XLNX) designs and sells programmable logic devices, the reprogrammable microchips used in everything from communications equipment to cars. Because PLDs have can be configured to fit the specific needs of OEMs, they’ve become a critical component in scores of different electronics -- and thanks to that increasing demand, the per-unit cost of the chips has been coming down, opening the door to new applications.
Because Xilinx operates in a duopoly with Altera (ALTR), competitive risks are fairly large. But the firm has been combating pressures from its rival by pouring R&D cash into proprietary designs and software that promote customers to stick with its chips.
The growing market for PLDs also helps to take some of the pressure off. In the next few years, as OEMs switch to these chips in more volume, a rising tide should lift all ships.
Xilinx sports an attractive balance sheet with a deep net cash position. Coupled with plenty of cash generation abilities, the firm should have no trouble keeping up with its dividend payouts in 2012.
On Tuesday, XLNX announced a 15.8% increase to its payout. The move gives the firm a 2.4% yield. Consistent increases and a strong yield make XLNX a good income option for tech sector investors this year.
Even though Realty Income (O) 0.21% dividend hike isn’t particularly impressive, the firm’s payout definitely is. The firm is another name that hiked its payout on Tuesday, bringing its monthly dividend to 14.58125 cents per share -- that’s the 65th dividend increase Realty Income has announced since going public back in 1994. Right now, this stock offers investors a 4.61% yield.
Realty Income is a real estate investment trust (or REIT), but don’t think that this firm is a great way to get exposure to the real estate market. While Realty Income does own 2,600 retail properties, their value isn’t realistically reflected in O’s share price in the near-term -- instead, this stock is an income generation vehicle, pure and simple.
Because commercial REITs enter into long-term triple-net leases with their tenants, they’re able to generate recurring surprise-free rental revenues without the hiccups of things like maintenance fees or property taxes. And the REIT structure means that Realty Income is required to pay out the vast majority of its income as dividends.
Those factors make this firm a perennially solid choice for investors looking for consistent, high yields.
To see these dividend plays in action, 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.