By Eli Inkrot
Why do we like dividends? Because we like to get paid. While it might be simple to go out and find the biggest yield you can, this method usually isn’t practical. Problems such as sustainability, unreliable income streams and finding a unique business model often get in the way. So income investors turn to the stable companies that have proven that they can consistently increase payouts while maintaining a fundamental business. The true beauty in this consistency is the power of time. Long term investors aren’t overly concerned over a current yield of say 2 or 3%; rather they’re looking forward 10 and 20 years, to 10 and 20% yield on costs. Problem is, even the greatest companies come to a point where growth is difficult. Let’s see if these 10 companies are poised to grow and become the dividend growth kings of 2012 or ready to pump the breaks.
Expeditors International of Washington (EXPD) is a logistics service company based in, you guessed it, Washington. This Seattle supply chain specialist comes in with a current yield of just 0.8%; not impressive yet. But EXPD has been deemed a “dividend contender” (David Fish), having increased its payouts for 16 consecutive years. The lowly payout of $.0125 in 1999 has since ballooned to $.40 today, a 32 times multiple creating a praise-worthy average 10 year dividend growth nearing 28%. EXPD did have a hiccup recently, increasing its dividend by just 5.3% in the last year. Still, with a recovering economy, wouldn’t it be nice to have more logistics? Bill Gates along with his 1.8 million EXPD shares thinks so, and the 25% payout ratio suggests future increases could be on the way.
Fastenal (FAST) has grown its dividend payouts by an average of 45% over each of the last 10 years. OK, so it might be cheating a little bit when you start with a split corrected annualized payout of $.0025, but then again it also demonstrates the power of growth. In recent years the growth rate has slowed a touch, but the 12 years of consecutive payout increases add stability. The current yield is just 1.5%, but if FAST can keep up the dividend growth rates there shouldn’t be too much concern for future yield on cost. A spot-on 1.00 beta and 55% payout ratio leave solid opportunities for the future.
American Express (AXP) has the highest current yield so far at 1.6%; still a far cry from many income investors ideal rate. But this credit card giant has been paying and increasing dividends since 1977. Recently there has been a stall at $.18 a quarter, as has been the case for the last 14 quarters. Some think that AXP needs to haul in more members to continue competing with the likes of Visa (V), Mastercard (MA) and Discover (DFS), but current debit card legislation might be pushing consumers towards credit cards. With a 21% payout ratio there appears to be room for future increases.
First American Corporation (FAF) This financial services company, specifically insurance and real estate, currently yields 1.5%. If you believe in a real estate come back, FAF could be a great place to see growth as it is the second largest title insurance provider in the U.S. Additionally, if things go well, FAF appears well positioned to increase dividend payments as the payout ratio stands at just 15%.
Like what you just heard about FAF, but want a higher current yield? Look no further than the largest U.S. title insurance provider Fidelity National Financial (FNF). FNF took over then third ranked LandAmerica to become the largest provider in 2009. The 3.3% current yield is above average and FNF has been paying dividends since 2005. But, dividends have been slowly declining as of late moving from a quarterly high of $.30 in 2008 to today’s $.12. Add in the 43% payout ratio and future growth could lead to more stabilized dividend increases. Whether it’s FAF or FNF, a real estate pickup could do wonders for increased dividend payouts.
Intel (INTC) ups the ante with its 3.6% current yield. This technology giant has been deemed a “dividend challenger” (David Fish) having increased its dividend for 8 consecutive years. For the last 5 years dividends have increased by an average of about 15% and if they do the same for the next 5 your yield on cost could double. Many investors are screaming bargain with INTC’s current Price to Earnings ratio around 10, very close to its historical low. Competition should be a concern, but the 35% payout ratio appears encouraging for both increasing dividends and reinvesting in the business.
Actuant Corporation (ATU) is not the tale of a strong dividend paying stock with its dismal 0.1% current yield. Don’t say it’s not consistent though, as this industrial products manufacturer has paid the same $.04 yearly dividend every September since 2005. More like an early Christmas bonus than an income stream. But, the near 8% of shares owned by insiders does suggest there is incentive to return shareholder value. Further, the 3% payout ratio makes ATU more than capable of ramping up its dividend payouts. Looks like a shoot for the moon growth play, but you have to start somewhere.
Abbott Laboratories (ABT) is no stranger to the dividend arena. Long deemed a “dividend champion” (David Fish) having not only paid but also increased its payouts for 39 straight years. The 3.8% current yield is well above average and the 65% payout ratio suggests future sustainability. In recent years the dividend growth rate has slowly been increasing, from an 8.8% average increase in the 10 year average to the 10.6% average increase in the 3 year average. It might not be poised for huge growth, but ABT does allow for a strong combination of a high current yield and steadily increasing payouts. If you believe the heath care sector has been left behind, it could be an opportune buy. ABT goes ex-dividend today.
Novartis AG (NVS) comes in with a solid 4.3% current yield. This Switzerland-based health care company is a “dividend contender” having increased its payouts for the last 10 years. Dividend growth has been ramped up considerably in recent years as the 10 year average growth rate of 6% makes way for the much more impressive 23% 3 year average growth rate. Factor in the 39% payout ratio and growth in 2012 looks promising.
Medtronic (MDT) backs up ABT on the “dividend champion” list, having increased payouts for 33 straight years. This medical device company comes in with a current yield of 2.2%. Not substantial, but there is promise for the future. With a 19% 5 year average dividend growth rate and a likely increase in July, the yield on cost looks to make quick moves. The 30% payout ratio works just fine and if health care revives, MDT could be a solid growth opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.