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Dividend Stocks: Kellogg, Altera, Digital Realty - 11392 views
By Jonas Elmerraji
Posted on July 30, 2010
Earnings season has brought dividend increases back in a big way during the last two weeks, ending the dry spell in July that previously had investors seeing only a handful of dividend hikes for the month. But we’re far from back to normal on the dividend front.
Despite a good number of companies increasing their payouts to shareholders this quarter, increasing management anxiety over the state of the economy has held the number of increase announcements well below the numbers we saw earlier in the year. For now, we’ll have to wait and see whether more companies are willing to foot the bill for increased dividends as earnings season progresses.
So why the big deal about dividends?
Historically, dividend stocks are a good place to be. 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% each and every year, all while paying out cash to their shareholders, according to a study from NDR. And right now, companies that are willing to part with cash in arguably tough times are worth a second look.
Here’s a look at this week’s dividend increasers.
Yesterday was rough for breakfast cereal giant Kellogg (K), with shares of the Frosted Flakes maker falling 6.87% Thursday following the company’s unimpressive earnings release. But while Kellogg did see its sales decline in the second quarter of 2010, that didn’t stop management from declaring an 8% dividend increase, bringing the stock’s current yield to 3.13%.
Lower sales don’t really tell the whole story, though. At the same time, Kellogg saw its profitability improve in the last quarter as operating efficiency numbers actually grew. That fundamental performance should be a strong driver for growth in 2010, as the company leverages its massive brand portfolio and distribution network to battle increasingly tough competition.
One of Kellogg’s biggest institutional shareholders is the State Farm Growth Fund (STFGX), which holds Morningstar’s coveted five-star rating. The fund owns stakes in ExxonMobil (XOM) and Microsoft (MSFT) in addition to its Kellogg position.
Semiconductor-maker Altera (ALTR) has had a strong run so far in 2010. Shares of the company are already up 22% year-to-date. But in today’s tough economic environment, management’s sweetening the pot by growing its dividend payouts to shareholders. The company increased their quarterly shareholder check 20% last week, bringing it to 6 cents per share.
Altera is a leader in the programmable logic chip market, devices that can be reconfigured to meet the needs of device designers. Programmable logic chips are being used increasingly in a number of applications, including communications infrastructure and industrial electronics. The flexibility of these chips means that they’re more expensive than alternatives, but in many cases, they’re the best solution available. As such, Altera enjoys big margins and generates significant cash, staying financially healthy enough to keep its small dividend safe for the foreseeable future.
That’s the hope of the Wasatch Global Science and Technology Fund (WAGTX), which owns a sizable stake in Altera. Other firms that count Wasatch as an owner include Akamai Technologies (AKAM) and Google (GOOG).
Niche real estate investment trust Digital Realty Trust (DLR) may not be the highest-yielding stock in its category, but it is one of the most interesting -- and one of the most consistent when it comes to dividend increases. Digital Realty, which leases properties to high tech firms, announced a 10.4% dividend increase last week, bringing the trust’s yield to 3.42%.
Digital Realty's primary property holdings are datacenters, digital storage facilities which are used by companies to maintain their internet presence or beef up their data networks. Datacenters are expensive to build and maintain, and as such supply is relatively inelastic -- with demand creeping up in recent years, Digital Realty has benefited in a big way, negotiating favorable lease terms and maintaining strong occupancy rates. Thanks to high switching costs, most of those leases continued to perform during the real estate market’s faltering in 2008. Those attributes should help Digital Realty to continue paying out solid dividends to its shareholders.
For the rest of this week’s dividend stocks, check out the Dividend Stocks portfolio on Stockpickr.
And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.