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Summary

  • When the “Dividend Champions” are referenced, the higher-yielding securities are frequently the focal point.
  • There are 5 Dividend Champions that “currently” yield less than 1%.
  • This article looks into the characteristics that these companies share.

When talking about consistent dividend payers, a lot of attention goes to the Dividend Champions -- companies that have not only paid but also increased dividend payouts for at least 25 consecutive years. For those chiefly concerned with a growing income stream, this list of 106 companies is used as means by which begin one's research. Often the screens look for the higher-yielding securities of the bunch. Companies like AT&T (NYSE:T), Consolidated Edison (NYSE:ED) or McDonald's (NYSE:MCD) come to mind. It's nice to find partnerships with both a propensity to reward shareholders and a strong starting income.

On the other hand, not as much consideration is given to the lower-yielding securities. This article will look into the 5 lowest-yielding Dividend Champions, specifically those "currently" yielding less than 1%.

As a preliminary note, all data was viewed via F.A.S.T. Graphs, which in turn utilizes S&P Capital IQ. Keep in mind that these numbers might not exactly match other sources as the methodology can differ (for instance, a blended P/E and "adjusted" earnings are used), but for our purposes they will work just fine.

C.R. Bard (NYSE:BCR)

This New Jersey-based healthcare company has over 13,000 employees specializing in four separate divisions: vascular, urology, oncology and surgical specialties. Here's how the company describes itself:

"For more than 100 years, C.R. Bard, Inc. has been developing innovative medical devices that meet the needs of healthcare professionals and patients. From a one man shop in 1907 to a global leader in the medical device industry we are committed to enhancing the lives of people around the world."

The company has not only paid but also increased its dividend for 43 straight years, yet its "current" yield stands at just 0.6%. So how did it get there and why isn't its yield higher?

Let's back up to 2000 to find some clarity. At the turn of the millennium, C.R. Bard had a yield of about 1.5% with a 35% payout ratio and P/E ratio in the vicinity of 21.

From that point on, the company was able to grow earnings per share by about 13% per annum while the dividend increased by just 5% annually. Today's P/E stands about the same, but the payout ratio has dropped to roughly 10%. As such, the dividend yield has decreased to just 0.6%. Further, because the P/E ratio remained relatively constant, price appreciation roughly tracked the business growth -- the total return over the past decade and a half has been on the magnitude of 13% per year.

Here's a case where the business did quite well and the dividend was growing -- but not as quickly as earnings per share. If you just look at the beginning and end yields -- 1.5% and 0.6% -- you might imagine that the performance and income weren't all that great. Yet neither were the case -- your yearly income doubled and you would have had 13% annual total returns to boot.

Today something like V.F. Corp (NYSE:VFC) shares some of the same characteristics as the C.R. Bard of yesteryear.

Energen Corp (NYSE:EGN)

This Alabama-based oil and gas exploration and production company has approximately 775 million barrels of oil-equivalent reserves and another 2.5 billion barrels of oil-equivalent contingent reserves. More pertinent to this article, the company has increased its dividend for 32 straight years and has a "current" yield of just 0.7%.

At the beginning of 2000, Energen Corp had a 3.7% dividend yield with a P/E ratio of about 10 and corresponding 38% payout ratio. Since that time, the dividend has grown by about 4% a year (half the rate of earnings) and the P/E multiple has gone up dramatically. As a consequence, the payout ratio stands at just 20% and performance results have come in about 16% annually.

The Energen example of 2000 reminds me a bit of Chevron (NYSE:CVX) today. It had a current yield in the mid-3% range and P/E ratio around 10. Given this, one might believe that just 4% or 5% annual dividend growth for Chevron over the next 15 years would be a disappointment. However, this misses the idea that this would still return nearly 80% of your money back in the form of dividend payments and certainly does not preclude you from solid performance results.

Franklin Resources (NYSE:BEN)

Headquartered in San Mateo, California, this asset management company has offices in 35 countries and clients in more than 150. Franklin Resources has increased its dividend for 34 consecutive years but yields just 0.8%.

At the start of 2000, shares of BEN traded with a P/E around 17 and a dividend yield of 0.8% -- resulting in a payout ratio of about 13%. Since that time the business has grown by about 13% per annum, while the dividend has followed suit -- keeping the same payout ratio and similar P/E and thus a very similar current yield. Additionally, shares have produced total returns on the magnitude of 12% annually.

Franklin Resources of yesteryear is actually a pretty solid example for the Franklin Resources of today. Moving from 2000 to today, in both instances BEN traded hands with a seemingly unimpressive dividend yield under 1%. People knock it for the low yield, yet what's overlooked in this view is the idea that your income would have increased by a factor of 6 and your total returns would be averaging about 12% annually. Thus the long-term investor might not want to ignore this security simply because of a low starting yield (this is especially true given the strong forecasted growth).

Nordson Corporation (NASDAQ:NDSN)

Nordson isn't exactly a household name; that is, unless you're in the precision dispensing equipment business -- in which case you know it as the leader in the industry. The company has increased its payout for an impressive 50 straight years, yet only yields about 0.9% presently.

Beginning in 2000, Nordson had a current yield of 2% with a P/E ratio around 14 and a corresponding payout ratio close to 30%. Since that time, earnings grew by about 12% annually while the dividend compounded at a rate of roughly 7% per year. Additionally, the P/E ratio has since climbed to the low 20 range. As such, the payout ratio has declined and the "current" yield is below 1%, but the company has had total return results averaging around 14% yearly.

The Nordson of 2000 reminds me -- with respect to current yield, valuation and payout ratio -- of an IBM (NYSE:IBM). A lot of people liked to discount Big Blue for its low yield, but what's neglected in that instance is that the yield remained low because of ongoing business and price increases -- not a lack of dividend growth.

Sigma-Aldrich Corporation (NASDAQ:SIAL)

Finally we have Sigma-Aldrich, which is a life science and high technology company that produces over 200,000 products -- ranging from chemistry and biology solutions to labware and ceramics. The company has increased its dividend for 38 uninterrupted years and has a current yield of 0.9%.

Fourteen and a half years ago, Sigma-Aldrich also had a current yield of 0.9%, with a P/E near 18 and a resulting payout ratio around 20%. The company then grew earnings by an impressive 11% annually. Even more impressive was that the dividend grew at a compound rate of about 13%. In total, an investor in 2000 would have now received nearly half of their original investment back in the form of a dividend -- despite the low initial payout. Due to the strong business and a bit of P/E expansion, the shares turned in 14% annual returns.

This one is reminiscent of Visa (NYSE:V), which currently yields just 0.8%. Many might cast this security aside in lieu of higher yielding alternatives. In the future perhaps you would see that Visa remains "plagued" with a low yield and pat yourself on the back. Yet this type of thinking misses out on the idea that high growth -- both of the business and dividend -- does not also require a high "current" dividend yield. It's similar to IBM back in 1995 "only" yielding 1.4% -- which would now give you back over 20% of your initial investment each year.

When you look at these low-yielding companies collectively, it's easy to dismiss them for their low starting yield. Some investors are bound by certain income requirements and that's perfectly fine. However, for those that have a long-term view and no immediate cash flow needs, you might want to look a bit deeper as to why certain companies have lower yields.

In this case, the question was given: if these companies have been raising their dividends for so long, why is the "current" yield so low? It turns out that the companies share a couple of common characteristics: either the earnings growth outpaced and/or matched the dividend growth or the P/E ratio expanded. In neither scenario does this inevitably hold back returns. In fact, quite the opposite is true. These 5 companies averaged total returns on the magnitude of about 14% annually versus the S&P 500's (NYSEARCA:SPY) mark of just 3%.

Here's the takeaway: if you're chiefly concerned with high income in the short-term you probably don't want to stray too far away from the AT&Ts of the world. Yet if you have a longer-term horizon, you concurrently have the option to consider lower starting yields. Companies like Visa and IBM could go for decades without ever having "current" yields of 3% or 4%, yet they still might produce large amounts of income in the future. Further, the high yield of today might be the low yield of tomorrow. The important part is to realize that either instance can be quite profitable.

Source: The Characteristics Of The Lowest-Yielding Dividend Champions