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Introduction

David Fish's Dividend Champions, Contenders, and Challengers spreadsheet is a well-known resource among dividend-growth investors. A company is considered a Challenger if it has increased its yearly dividend payout for at least five (but less than ten) years, a Contender if it has increased its yearly dividend payout for at least ten (but less than 25) years, and a Champion if it has increased its yearly dividend payout for at least 25 years.

As of November 10, 2013, there are a total of 209 Challengers, 153 Contenders, and 105 Champions in Mr. Fish's spreadsheet. Sifting through them to find a worthwhile investment can be a daunting task.

In this article I present the results of a screen of these 467 companies inspired by the investing thesis in the book Dividends Still Don't Lie by Kelley Wright. The idea is to find dividend-growth stocks that currently offer high dividend yields, as compared to their historical yields, and use that as a starting point for performing due diligence.

This approach is similar to the "buy high, sell low" approach used by Deschaine and Company. Their idea is to consider buying a dividend-growth stock if it offers a yield above its trailing 5-year yield, and consider selling a dividend-growth stock if its current yield is at least one standard deviation below its trailing 5-year yield.

As long as a company doesn't cut its dividend, there are two things that can cause its stock's yield to go up---a dividend increase or a price decline. Dividend-growth stocks offering historically high yields, then, are stocks whose prices have not kept up with their dividend increases lately. As part of due diligence, we must ask why this is the case. Such stocks can be value traps. However, if a stock offers a price/yield mismatch that is not due to deteriorating fundamentals, then it may offer outsized returns going forward.

A representative example: Coca-Cola

All charts presented in this article follow the following legend.

The black line represents the stock's historical price, while the blue line represents the stock's historical dividend yield. The grey line represents the stock's average historical dividend yield. Green lines represent yield levels that are one and two standard deviations above the historical yield, while orange and red lines represent yield levels that are one and two standard deviations below historical yield levels.

Let's look at some charts for Coca-Cola (KO).

(click to enlarge)

These charts show the yield and price of KO, from 1996 to present, together with the average trailing 5-year (resp. 10-year) yield and the average trailing yield plus or minus one or two standard deviations. We can see in both graphs that buying KO when the blue line (yield) is significantly below the orange line has led to poor results going forward, but buying when the blue line is between the green lines or above the top green line has typically led to good results. Currently, KO's yield is about average.

The screen

Since Challengers, Contenders, and Champions have different dividend histories, I applied filters of different time-window lengths to these stocks. For Champions, I searched for stocks having current yields at least one standard deviation above average in at least two out of three most recent 5-year, 10-year, and 15-year windows. For Contenders, I looked at 4-year, 7-year, and 10-year windows, and for Challengers, I looked at 3-year, 5-year, and 7-year windows.

Champions with historically high yields

Champions have at least 25 years of dividend growth history. Here are the Champions with historically high yields.

Champions with historically high current yield
StockCurrent yield#s.d. above trailing 5-year yield#s.d. above trailing 10-year yield#s.d. above trailing 15-year yield
BRC2.7%0.5041.1551.143
DBD3.9%0.7191.1181.516
DCI1.3%0.8441.361.361
XOM2.8%0.7961.2541.255
HP2.6%3.4034.1464.149
NWN4.3%2.4651.7360.212
TGT2.7%1.7571.9052.334

Here are the 10-year trailing average charts for the two of these Champions for which all three values in the chart exceed 1.

(click to enlarge)

Note that (HP) is Helmerich & Payne, not Hewlett-Packard. For HP, the price/yield mismatch seems to come primarily from the recent explosive dividend growth. HP recently increased its dividend by 233%, and it now yields 2.60%. Target (TGT) has been facing some uncertainty lately, mostly related to its Canadian expansion, but has continued raising its dividend at a fast clip. TGT sports a relatively low 13.26 forward p/e and currently yields 2.70%. I think TGT is attractive to the long-term dividend growth investor at this point.

Exxon Mobil (XOM) also seems attractive at this point. Here is its chart.

(click to enlarge)

XOM has a forward p/e of 11.61 and yields 2.8%.

Contenders with historically high yields

Since Contenders only have 10 to 24 years of dividend growth history, I looked at smaller trailing windows. Here are the Contenders that offer current yields at least one standard deviation above at least two of their trailing 4-year, 7-year, and 10-year yields.

Contenders with historically high current yield
StockCurrent yield#s.d. above trailing 4-year yield#s.d. above trailing 7-year yield#s.d. above trailing 10-year yield
CHRW2.3%1.1471.4781.67
CNQ1.5%1.2121.6651.745
CHD1.7%0.4271.0541.381
DE2.5%1.1830.9031.157
EXPD1.3%0.781.1891.486
IPCC1.8%0.8661.3211.636
IBM2.1%1.8051.3911.334
JW.A1.8%0.6121.0241.361
OXY2.7%0.9621.2661.414
QCOM2.1%1.3451.6561.589
RGLD1.7%2.1072.8253.109
TEVA3.45%1.8742.3452.668
TXN2.9%1.2161.3261.467
WMB4.2%1.3221.7012.006
WEC3.6%1.6611.4381.801

Here are the 7-year trailing average charts for these Contenders where all three values in the chart exceed 1.

(click to enlarge)

Of these, I think Qualcomm (QCOM) and Wisconsin Energy Corp (WEC) are the most attractive. QCOM has a forward p/e of 12.4 and yields 2.10%. WEC is on record as having a target payout ratio of 70%. Their payout ratio is currently 59% after having increased their dividend twice in the last 12 months, so we should expect strong dividend growth from them going forward. WEC has a forward p/e of 16.23 and yields 3.60%.

IBM and (TEVA) may also be attractive, depending on your tolerance for risk and business uncertainty going forward. IBM has a forward p/e of 9.98 and yields 2.10%, while TEVA has a forward p/e of just 7.39 and yields 3.45%.

Deere & Company (DE) also seems attractive at this point. Here is its chart.

(click to enlarge)

DE has a forward p/e of 10.9 and yields 2.5%.

Challengers with historically high yields

Since Challengers only have 5 to 9 years of dividend growth history, I looked at even smaller trailing windows. Here are the Challengers that offer current yields at least one standard deviation above at least two of their trailing 3-year, 5-year, and 7-year yields.

Challengers with historically high current yield
StockCurrent yield#s.d. above trailing 3-year yield#s.d. above trailing 5-year yield#s.d. above trailing 7-year yield
DRI4.3%0.781.2161.368
DLR6.8%3.9983.8353.777
ELS2.6%1.121.1940.985
NSH8.7%1.4311.4771.439
RKT1.3%1.5681.4441.212
SU2.2%1.331.671.82
UBNK2.8%0.7141.141.351

Here are the 5-year trailing average charts for these Challengers where all three values in the chart exceed 1.

(click to enlarge)

Since these companies have only relatively short histories of dividend growth, more due diligence must be done. Darden Restaurants (DRI) has been facing headwinds (in the form of weakening sales and declining earnings) that may threaten the safety of its dividend. These issues have caused several dividend growth investors to sell. Digital Realty Trust (DLR) faced a vicious short attack by Jonathon Jacobson of Highfields Capital this summer, who argued that shares should only be worth about $20. However, DLR has continued paying its regular dividend since then, and its next dividend increase is expected in March of 2014. If you think Mr. Jacobson is wrong, now may be an excellent time to buy. Of these companies, I think Suncor (SU) is the most attractive, and NuStar GP (NSH) may be worthy of due diligence.

Data sources

Price and dividend history were sourced from Yahoo Finance and individual company web pages. Split history was sourced from getsplithistory and individual company web pages. All computations were performed and all charts were drawn using the computational mathematics package Sage.

Summary and Conclusions

While due diligence is always necessary before putting your hard-earned money at risk, it is especially important before purchasing stocks having historically high yields. Several of the stocks listed above are probably value traps. Personally, I would be very cautious about investing in Diebold (DBD), Royal Gold (RGLD), DRI, and DLR right now.

On the other hand, this screen turned up several interesting possibilities, including DE, XOM, IBM, QCOM, TGT, and WEC. I didn't know these companies offered historically high yields before doing this screen, and they have all been on my list of companies to consider purchasing or adding to in the near future. This screen also turned up a few possibilities for future due diligence, including TEVA, SU, and NSH.

What do you think? Which of these stocks are value traps, and which will prove to be good investments going forward?

Source: These Dividend Growth Stocks Have Historically High Yields

Additional disclosure: I may initiate a long position in any of the other stocks mentioned in the article at any time.