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BALTIMORE (Stockpickr) -- As months like August remind us, in the land of falling stocks, cash is still king.
All told, the S&P 500 Index shed 6.8% last month, bringing the broad market’s total performance for 2011 to -4.23%. That’s a catastrophic turnaround considering the fact that we entered the summer months almost 10% in the green.
It was a different story for dividends, though.
The S&P 500 High Yield Dividend Aristocrats Index, which is made up of 60 consistent income-paying stocks, has actually delivered positive returns of 0.45% this year. That may not be a return to write home about, but it at least beats the yield on three-year Treasury Notes right now. Don’t be surprised that dividends generate better returns; income stock outperformance is nothing new.
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Historically, dividend-payers have made a whole lot more money for investors than their nonpaying peers. 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.
Pickings were fairly slim for dividend payers last month -- that’s the reason why today’s list actually covers the previous two weeks instead of our typical look at last week’s hikes.
With that, here’s a look at our list of recent dividend-increasers.
Mid- and small-cap names dominated our list of dividend increasers to end August, but the big exception was Altria (MO). The $56 billion tobacco company announced a 7.9% dividend increase last week, ratcheting the firm’s yield to 6.05%. That means that with dividends factored in, the stock has generated total returns of 13.3% so far in 2011 -- that’s an impressive feat.
Altria has been shaking up its business in recent years, splitting off nontobacco divisions like Kraft Foods (KFT) into separate businesses, and doing the same with its growth-centric international division, now Philip Morris International (PM). The result is a firm that currently holds the top spot in the U.S. tobacco industry, a market that Altria currently controls half of. The U.S. is a difficult market for tobacco firms, given the effectiveness of anti-smoking campaigns in recent years and continual regulatory challenges. Still, this firm’s sticky customer base should continue to drive revenue for the foreseeable future.
Despite Altria’s sale of noncore businesses in recent years, the company has retained its 27.1% stake in SABMiller (SBMRY), the beverage stock that Altria sold Miller Brewing to in the early 2000s. It’s among a handful of other “sin stock” related businesses that the company held onto. Altria’s dividend payouts are impressive right now, and massive cash-generation capabilities should keep them flowing for the foreseeable future. That said, investors should keep a close eye on sales as the firm’s core market contracts.
HCC Insurance Holdings
It’s been a challenging summer for specialty insurance firm HCC Insurance Holdings (HCC). Despite strong stock performance to start the year, the company saw a sharp selloff at the end of July that pushed shares into losing territory for 2011. That said, with dividends factored in, shareholders are still up year-to-date.
HCC is in the business of providing insurance products to commercial and personal customers worldwide. The firm is a leader in smaller insurance markets where competition is less -- that’s a very attractive focus for an insurer, whose offerings tend to be commoditized these days. With Hurricane Irene a not-too-distant memory for millions of East Coasters, investors are understandably wondering just how much insurers will get hit. The short answer is “not much” -- damage by the storm looks to be a fraction of initial estimates, and most monetary damage was due to flooding, which is insured by the Federal government. In other words, HCC should avoid a big hit to its financials.
The company announced a 6.9% dividend increase last week that brings the firm’s total quarterly dividend payout to 15.5 cents per share. That upgrade brings HCC’s yield to 2.15% right now.
Westlake Chemical Corporation
Westlake Chemical Corporation (WLK) is another mid-cap name that boosted its payouts to shareholders last week. The company announced a 16.14% increase that brings its quarterly dividend to 7.375 cents per share -- while the firm’s 0.67% yield hardly makes it a core income holding, the fact that management is willing to part with extra cash in this market is telling.
Westlake produces basic chemicals, polymers, vinyl and PVC, an offering mix that give the company significant exposure to industrial production and the construction industry. Essentially, that means that Westlake benefits from higher levels of production in the broad economy, potentially scary exposure given the potential for a double-dip recession.
That said, investors shouldn’t be too quick to run from this name. Westlake currently has $712 million in cash and equivalents on its balance sheet, nearly enough cash in its coffers to offset its entire long-term debt load. Consistent cash flows and a P/E under 10 make this stock worth a second look despite that exposure. Payouts have room to grow.
Independent oil and gas E&P Berry Petroleum (BRY) has had to deal with volatile commodity prices in 2011 that have thrown around the value of its wares. While the year started off strong for oil, volatility increased dramatically during the year, and the trend reversed downward for oil back at the end of April. While that does mean that most oil producers won’t see the blockbuster profits that they expected when oil was sitting at triple-digits, investors shouldn’t cry for firms like Berry.
That’s because oil still remains at relative highs right now, maintaining profitability in Berry’s economically viable production sites. Another benefit to Berry is the firm’s heavy exposure to natural gas -- while gas prices have gotten knocked around so far this year, the consensus remains that gas prices will rise as market participants substitute it for more expensive fuel sources.
Berry’s 6.67% dividend hike last week brings the firm’s total quarterly yield to eight cents per share.
Cincinnati Financial Corp.
Another mid-cap insurer that made this week’s list is Cincinnati Financial (CINF), a property-casualty insurance firm. Because Cincinnati Financial caters primarily to smaller commercial clients through independent agents, the firm is able to make the most of personal relationships that agents have built. That’s the main reason why agents are at the center of the firm’s expansion plan -- keep your agents happy and sales will follow. That mantra has played out incredibly well in the last few years; at present, Cincinnati Financial provides the lion’s share of insurance coverage for most of its agencies.
One potential tripping point for Cincinnati Financial is the firm’s regional exposure to the Midwest. While a relatively limited geographic footprint suggests that there’s still a lot of room for growth, it also means that the impact of casualty risks are magnified in CINF’s home base. To combat that risk, management has been pairing an ambitious growth plan with a conservative balance sheet – a winning combination, in my view.
The firm’s 0.63% dividend increase may be one of the smallest from the last two weeks, but Cincinnati Financial’s overall yield is one of the biggest. At present, the company’s dividend yield weighs in at 5.87%, making this stock a solid option for investors in search of a core holding for their income portfolios.
Solera Holdings (SLH) is a software firm that services the car insurance business, providing the tools that insurers need to process claims and manage repair records. While the niche nature of Solera’s business initially seems limiting, the firm’s dominance in the industry means that it has a defensible position, while international expansion provides growth opportunities.
One of the things that make Solera’s business so attractive is its proprietary database. While the firm generates significant revenues on sales of its software, it’s able to collect recurring sales for access to its massive database of data that help to prevent fraud and estimate costs -- Solera gets paid by the claim, which means that its revenue is a product of its clients’ customer pools, not just Solera’s number of clients. The firm has gone to great lengths to expand its offerings overseas; today, Europe contributes the majority of revenues, and expansion into new markets like India and China offer opportunities for meaningful growth in the near- to mid-term.
Two weeks ago, management announced a 33.3% dividend increase that brings Solera’s payout to 10 cents per quarter.
Group 1 Automotive
Small-cap auto dealer Group 1 Automotive (GPI) operates 129 auto franchises at 100 dealerships in the US and the UK. The firm also owns 22 collision service centers stateside. While auto sales have been under significant pressure in the last few years, investors’ fears have largely been unfounded. Selling cars may be a capital-intense business, but the most financially vulnerable dealerships closed their doors during the depths of the 2008 financial crisis.
Now, with credit flowing more freely once again, dealers like Group 1 are seeing a return to normalcy in their financial performance. Group 1’s sales are already approaching their pre-recession highs.
While car sales aren’t a dying business, they’re also not a growth business here in the U.S. To combat that, Group 1 is another stock that’s been pushing abroad. The company already holds a significant presence in the UK, but now, a bigger push to Europe could spell growth for Group 1. Domestically, a focus on selling higher-margin products (like service contracts for used cars) should spur some top-line growth in the near-term.
Last week’s 18% dividend hike brings Group 1’s dividend payout to 13 cents per share each quarter, a 1.27% yield at current prices.
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-- 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.