Articles filed under "dividend growth"
As you would expect (or should expect) in a strong market, dividend paying stocks haven’t kept pace with more growth-oriented non-dividend payers. According to S&P Dow Jones Indices, the non-dividend payers in the S&P 500 gained an average of 34% in the first 10 months of the year, compared to a 28% rise for the dividend payers. In the 12 months through October, when the S&P 500 rose 28% in price and 31% on a total return basis, the non-dividend payers gained 43% compared to 32% for the dividend payers.
While dividend newbies no doubt are going to be gnashing their teeth over that, it’s not a reason to question dividends. They’ve provided about 40% of the return to shareholders over decades which include hot times like these, and not so hot times.
But clearly 2013 has seen an important shift in dividend investing. A year ago the yield for the S&P 500 was 2.3% at a time when 10-year Treasuries yielded 1.6%. Today the S&P 500 dividend yield has fallen to 2%, while Treasuries pay 2.7%.
Improving global economic growth is expected to serve as a tailwind for the industrial sector in 2014. Big boys including General Electric (GE), United Technologies (UTX) and Danaher (DHR) are well positioned to pick up revenue from the anticipated uptick in capital expenditures. Ritchie Bros. Auctioneers (RBA), which brokers the resale of large industrial equipment via on-site and online auctions is a decidedly under-the-radar entry point into the sector.
Given its $2.1 billion market cap, Ritchie Bros. Auctioneers might not be on the tip of your tongue, but it’s definitely got the attention of some major investors. Small cap experts Royce Asset Management and the venerated Primecap Asset Management (managers of Vanguard Primecap and Capital Opportunity funds) each own more than 7% of Ritchie Bros. outstanding shares.
Ritchie Bros.’ teeny market cap isn’t more a than rounding error at behemoths such as Google (GOOG), Johnson & Johnson (JNJ) and Berkshire Hathaway (BRK.B). Nonetheless, Ritchie Bros shares a telling characteristic with those mega caps: a designation as one of the 150 or so companies that has a large enough competitive edge to earn a wide-moat designation from Morningstar. (Full disclosure: Morningstar is an investor in YCharts.)
Dividend stocks are more popular than ever, despite higher interest rates that were supposed to send them out of favor. Several big dividend ETFs are trading at or near all-time highs, as seen in the price charts for iShares Select Dividend ETF (DVY), SPDR S&P Dividend ETF (SDY), Vanguard Dividend Appreciation ETF (VIG) and WisdomTree Large Cap Dividend (DLN).
But investors searching for healthy dividend investments now have their work cut out for them. With slow economic growth and rising rates paid on bonds, such as the 10-year Treasury, it’s increasingly important to pick dividend companies with the strength and commitment to fund dividend growth, not to simply maintain a payout.
YCharts pulls together here a set of charts and screens with metrics useful for evaluating a company’s financial ability to increase a good dividend. Consider this as a checklist of sorts to complement broader investment research into income investments.
Over the very short term the markets may well be whipped around by Washington inanity. On the government-shutdown front, S&P Capital IQ points out that during the 1995-96 shutdown the S&P 500 lost 3.7% but then gained 10.5% in the month following that bit of folly.
During the 2011 debt-ceiling imbroglio the S&P 500 fell 10% from late July to early August. There were more moving pieces to deal with in the summer of 2011 -- Europe was in the depths of its own debt problems -- but by year end the S&P had retraced nearly half that loss and by the end of the first quarter of 2012, it had snapped back with a 17% rise from the August 2011 low.
That’s the long-winded way to suggest that whatever sell-off occurs will be short-lived and the markets will eventually get around to paying attention to fundamentals. And that’s where things get really interesting. As dark as Washington may make the next few weeks, the expectation is that economic growth is on track to accelerate in the fourth quarter and next year.
Moody’s Analytics forecasts GDP growth will accelerate from 1.9% this quarter to 2.7% in the fourth quarter. In 2014 Moody’s expects GDP to expand 3.2%.
If that’s indeed how things play out, that means the Federal Reserve will likely begin its stimulus taper in the coming months, which could put more upward pressure on long-term interest rates. As we all saw when taper talk began in May, that move is a loud signal that interest-rate sensitive sectors are especially vulnerable.
After a $900 million write-off for its Surface tablet in July, the late August announcement-under-pressure of CEO Scott Ballmer’s retirement, and the less than enthusiastic response to the early September news it will spend $7 billion for Nokia’s cell phone business, Microsoft’s (MSFT) just-announced 22% dividend hike smacks of “if you can’t please ‘em, at least pay ‘em more.”
After being teased with a stronger than expected first quarter report that sent the stock up 25% from mid April to early July, Microsoft has fallen back during its the past two months:
The dividend hike also comes on the heels of the second quarter jump in the 10-year Treasury rate. Income-starved investors who have been migrating over to dividend paying stocks spent 2011 and 2012 enjoying dividend yields that exceeded the T-note payout. But starting with the mid-May rate spike, Microsoft (along with plenty of other blue chips) lost its appeal as a bond-substitute; its current 2.8% payout is now below the 2.9% Treasury rate.
McDonald’s (MCD) is heavily dependent on Europe. Sales in that region accounted for nearly 40% of sales last year, compared to the 32% revenue share for U.S. operations and 25% for the grab-bag, APMEA grouping (Asia, Pacific, Middle East and Africa).
The protracted recession and high unemployment across much of Europe goes a long way to explaining McDonald’s revenue slog since the financial crisis.
In August, McDonald’s delivered a bit of a Euro surprise. Same store sales in Europe had a much better than expected 3.3% rise , a pretty nice U-turn from the 1.9% same store decline in July.
While the long-term case for dividends - especially dividend growth - as a driver of stock returns firmly appreciated these days, Horan Capital Advisors points out that year to date it’s the non-dividend payers that have outperformed their income counterparts in the index. On a equal weighted basis, non-dividend payers including Google (GOOG), Berkshire Hathaway (BRK.B), Amazon (AMZN) and DirecTV (DTV) had a year to date total return of 24% through August, compared to 17.9% for the dividend payers. Over the past year, the income holdouts are up an average of 30.7% compared to 24% for the dividend payers.
Horan explains that this is being driven by the fact that smaller caps within the index are outperforming, and smaller cap stocks tend not to focus on dividend payouts. Granted, smaller within the context of the S&P 500 is relative, given the smallest, Advanced Micro Devices (AMD) has a market cap of $2.7 billion, and Google at $295 billion is anything but a small cap.
But indeed, while the average market cap for the S&P 500 is more than $62 billion, 64 of the 82 non-dividend payers in the index have a market cap of less than $20 billion, including Netflix (NFLX), Dollar Tree Stores (DLTR) and DaVita Healthcare (DVA). (A quick shortcut to isolate the non-dividend payers in the S&P 500: Use the Screener to zero in on the S&P 500 stocks by choosing “intersect” and then choose S&P 500 under the Index option in the drop down menu. Then move the dividend yield slider to 0%.)
Indeed, bona fide small caps, not just the smaller fry in the S&P 500 have been outperforming lately:
The smart money has always known that the key to exploiting the dividend advantage is to focus on the capacity of a company to consistently increase its dividend, rather than get all worked up about the current yield. That’s become doubly timely lately as rising interest rates have diminished the appeal of stocks that were popular as fixed income surrogates during the epic rate repression since 2008.
Every since Ben Bernanke lobbed the first mention of taper, yield standouts have been slammed, as seen in this chart of the performance of the utility and REIT sectors (price only) since mid May.
With the case for dividend growth moving back to the forefront -- where it always belonged -- scouring the portfolio of the $16.6 billion Vanguard Dividend Growth mutual fund can turn up some interesting stocks to conduct further financial research on. Manager Don Kilbride is resolutely focused on growth, not yield; the fund’s 1.9% income payout is merely in line with the S&P 500 dividend yield.
When the 10-year Treasury yield rose from the dead beginning in early May, one-trick pony stocks that were delivering high dividend yields without a compelling dividend growth or stock valuation story to complement the payout, got beat up. The Telecom and Utility stocks in the S&P 500, including the likes of AT&T (T), Verizon (VZ), Duke Energy (DUK) and Southern (SO) have badly lagged since the spring rate uprising:
Sam Stovall, chief equity strategist S&P Capital IQ recently pointed out that another strike against those two sectors in a rising rate environment is that they are home to some pretty high debt-to-capital ratios. The telecom sector is at 57%, and Utilities at 50.5%, compared to the 38% average for the entire S&P 500 index. The consumer defensive sector wasn’t far behind Utilities at 49.7; it too has been dragging behind the market average.
Recently released IRS data for 2011 tax returns show individuals reported $83.3 billion in interest income. That’s nearly $100 billion less than the interest income earned in 2007, when the Federal Reserve was still a year off from quantitative easing and pushing short-term interest rates from above 5% to the zero bound that is expected to persist at least through the end of 2014.
That of course goes a long way toward explaining why dividend paying stocks and ETFs have seen boatloads of inflows since the financial crisis. The S&P 500 currently derives 2.6% in returns through its dividend payouts.
Until recently that dividend payout was more than the yield for the 10-year Treasury.
Even in the wake of the recent rise in the 10 year Treasury yield to above 2.5%, more than 100 stocks in the S&P 500 still have higher current dividend yields, including Pfizer (PFE), Microsoft (MSFT), General Electric (GE) and Coca-Cola (KO), as seen on the YCharts Stock Screener.
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