Articles filed under "dividend growth"
Honeywell (HON), which has outperformed General Electric (GE) in recent years, plans to distribute an increasing share of its earnings in the form of dividends over the next five years, a change in policy.
For the last five years, Honeywell has boosted its payout roughly in line with increases in earnings. In an investor presentation, Honeywell says it now plans for dividends to rise faster than earnings through 2018.
Warren Buffett speaks frequently of businesses protected by a competitive moat, and few if any Berkshire Hathaway (BRK.B) units can out-do the moat enjoyed by Burlington Northern Santa Fe, the railroad Buffett bought 77.4% of (Berkshire already owned the rest) for $34 billion in 2009.
Assembling the rights-of-way to lay down tens of thousands of miles of track seems next-to-impossible at this late date, giving the existing railroads enormously lucrative franchises. You can’t buy stock directly in BNSF, as Berkshire’s rail unit is known, but, as we’ve noted in the past, Buffett didn’t buy all the railroads.
The one that most mirrors BNSF is of course Union Pacific (UNP), its roughly 32,000-thousand-mile network of track paralleling the BNSF lines covering the Western two-thirds of the U.S. And as happy as Buffett sounds about his railroad, Union Pacific holders have easily as much to cheer about.
That chart shows performance since November 3, 2009, the day the acquisition of BNSF was announced.
YCharts has been harping on dividend growth, as opposed to mere current dividend yield, in dozens of articles in recent years. Why? One, a fixation on high current yield can lead investors to pricey stocks with low-growth (and low dividend-growth) prospects. And two, for long-term value investors, a growing dividend is a great way to realize above-inflation-rate income growth paid out from companies that have good overall growth prospects.
You can peruse a library of dividend growth articles on YCharts.
We offer this reminder after Brendan Conway, in Barron’s smart ETF column this past weekend, quoted Bank of America Merrill Lynch’s Savita Subramanian as calling dividend growth “something of an investor dead zone,” trading at a slight discount to higher-yielding shares.
The market strategist suggests why. With interest rates, including the 10-year Treasury rate, so low, income investors are desperate for yield and have invested heavily in fat-dividend payers, with less emphasis on the prospect of that dividend growing. Investors less (or not) interested in income, meanwhile, are piling into hot growth shares like Tesla (TSLA), Netflix (NFLX), Amazon (AMZN) and the like.
Naveed Rahman, an institutional portfolio manager on Fidelity’s equity income team recently called out technology stocks as a compelling place to find companies with the capacity to keep filling the dividend trough given they are generating “prodigious amounts of cash flow, and cannot reinvest all that cash as successfully as they could 10 years ago.”
For the record, Google (GOOG) also generated more than $11 billion in free cash flow over the trailing 12 months, but it doesn’t get into this conversation given it has yet to cross over to the dark side (at least in terms of what it seems to say about a company’s growth outlook) and pay a dividend.
So, with it well established that large tech companies are raking in more cash than they seem to know what to do with, it seems the more pertinent question for income seekers is: who has the most compelling dividend story going forward?
The UPS (UPS) dividend hike this week pushed the company’s dividend yield closer to 3%. The stock hasn’t yet fully recovered from the news that UPS mishandled a surge in holiday deliveries, despite the fact that the forces behind that surge, including huge and late volume from Amazon (AMZN), were all good news for UPS, as YCharts wrote earlier.
The 8% dividend hike pushes the quarterly payout to 67 cents a share, or an annualized $2.68. The company will distribute, at that rate, roughly $2.5 billion in dividends. Last year, it also spent $3.8 billion buying back its own shares. Combined, the two give UPS a shareholder yield of about 5.6% (before the new higher dividend, which is payable March 11 to holders of record February 24).
Now that the 10-year Treasury rate is hovering around 3%, income investors are finding it ever harder to find bond-beating dividend yields from stocks.
That said, owning Treasuries at this juncture still exposes you to potential price slumps this year, if, as expected, rates continue to climb. Sure, there’s embedded risk in all stocks as well, but that just ratchets up the challenge to find stocks with high yields that have a compelling forward story.
A few of the biggest global players made the screen, including Microsoft (MSFT), General Electric (GE), Pfizer (PFE) and Chevron (CVX). Given that General Electric and Pfizer have checkered histories in maintaining and/or consistently growing their dividend, let’s boot them from the conversation.
Nearly 85% of the stocks in the S&P 500 index paid a dividend in the third quarter; that’s a 17-year high according to FactSet. And payers aren’t scrimping. The $339 billion paid out in the 12 months through September is more than double the level of dividend payouts 10 years ago.
Getting your share of that income stream can be expensive, however. For example, the news that Boeing (BA) is lifting its dividend payout by 50% (and authorizing another $10 billion repurchase plan) comes after a year when its trailing 12-month PE ratio ballooned from below 14 to nearly 24. And the rising market has turned plenty of other dividend champs into pricey stocks.
So, if you’re looking for a sweet spot in dividend land, technology is the sector to set your sights on for further investment research. Tech stocks in the S&P 500 clocked 12 months dividend growth of 46% through September. Yes, Apple’s (APPL) big dividend hike is a main driver, but FactSet notes that even if you back out Apple, dividend growth for the tech sector was a still strong 23.3% over the 12 months through September; good enough to hold onto the top spot among S&P 500 stocks in terms of dividend growth. And from a valuation standpoint, the sector’s 13.8 projected PE ratio for 2014, according to S&P Capital IQ, is well below the 14.7 estimate for the entire S&P 500.
Among the tech stocks in the S&P 500 that grew dividends at least 20% over the past 12 months are Cisco (CSCO), Qualcomm (QCOM), Oracle (ORCL), Texas Instruments (TXN), Corning (GLW) and Seagate Technology (STX). Granted, that’s a bit of a motley crew. Cisco and Oracle are behemoth old techs that haven’t proven they can lead in a new-tech world. From a dividend perspective, Corning’s recent dividend growth comes after a few years of stagnation. And Seagate cut its dividend during the global recession.
AT&T (T) shares offer an eye-catching 5%-plus dividend yield now, which puts the telecom among the top 10 highest yielders in the S&P 500. But will poor share price performance wipe out the benefits of its big dividend? Pitiful gains in AT&T shares this year already make them look bad next to the broader market, even with those outsized dividends.
AT&T, like many companies offering hefty dividends, has problems that cause shareholders to reach for the Rolaids. Its residential landline businesses is in decline, which means the earnings and cash flow spun out for niceties like big dividends and investing in higher growth ventures is scarce. If revenues from wireless services don’t grow fast enough, the share price could fall enough to essentially wipe out the benefits from that big yield. Or the company could limit the dividend increases. Considering how much a shareholder should worry about these worst-case scenarios is a good exercise for any investor ogling AT&T’s yield now.
In occasional columns, YCharts uses fundamentals analysis to evaluate big dividends. For a right-brain element, we also assign a rating for each investment based on an estimated stress level taking on the shares would generate. A 3-Rolaids rating indicates a high risk investment; a 1-Rolaids rating the least risky. (High yield investments that don’t involve antacids are rather rare.)
Despite the best efforts of socially conscious investors, a tobacco company has become a popular way for so-called widows and orphans to collect income at a decent rate. Altria (MO), whose dividend yields around 5.2% now, has generated relatively steady, strong returns for investors for the past five years. Today, the maker of Marlboros and Merits looks like one of the more conservative income bets in S&P 500 stocks.
Altria gets a One-Rolaids rating on the YCharts Dividend Stressometer, a bogus device that uses serious fundamentals analysis to measure risk in big dividend stocks. Most stocks paying large dividends make shareholders reach for antacids at times, because high dividend yields often come from troubled or slowing businesses (and by definition from out-of-favor stocks). One-Rolaids investments are most likely to create only a low level of stress. Two-Rolaids investments have a higher potential for causing moderate anxiety. Three-Rolaids investments are most likely to create serious heartburn.
Prior columns on in this series on big-dividend payers focused on healthcare-focused REITs with dividend yields of about 5.5%, HCP (HCP) and Health Care REIT (HCN), and on Windstream Holdings (WIN) and its gigantic payout, yielding about 12.5%.
Poor returns from Health Care REIT (HCN) and competitor HCP (HCP) this year provide reminders that investors can lose money while collecting big dividends, even when the underlying companies are sound. They offer cautionary tales for income investors attracted to their 5.5%-plus dividend yields now.
Both Health Care REIT and HCP get Three-Rolaids ratings on the YCharts Dividend Stress-o-meter, a bogus device that uses serious fundamentals analysis to measure the level of risk in big dividend stocks. Most stocks with large dividend yields create the need for at least a little antacid, because high yields often come from troubled or slowing businesses. One-Rolaids investments are most likely to create only a low level of stress. Two-Rolaids investments have a higher potential for causing moderate anxiety. Three-Rolaids investments are most likely to create serious heartburn.
An earlier column dissected the prospects of Windstream Holdings (WIN), and its 12.5% dividend yield.
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