By Eli Inkrot, Guest Editor
Why do income investors like dividends? They like to get paid. Why should any investor like dividends? It is one of the surest ways to signal financial strength.
New companies often reinvest all of their profits to grow the company. Eventually the company reaches a stable point whereby it can afford to both reinvest an adequate portion of profits and pay out the significant leftovers. The longer a company is profitable, the longer it is able to not only pay out but also increase dividends. Let’s see if these six stocks have what it takes to be the dividend kings of the future.
I actually used a 3M (MMM) product to write this article and I bet you have used it too: Post-It. But this Minnesota-based industrial goods company is more than sticky notes and clear tape. MMM is extremely diversified with products ranging from electronics and healthcare to transportation and leisure. It’s no surprise, then, that 3M’s competitors are just as varied, with the likes of DuPont (DD), Johnson & Johnson (JNJ) and Avery Dennison (AVY) sharing industries.
This conglomerate giant has a long and well-established history in the dividend game, having not only paid but also increased payouts for the last 53 years, placing it ninth among active U.S. equity streaks. MMM has a current yield of 2.3% and a price to earnings ratio around 16. Historically, both of these numbers appear to be in line, although income investors likely prefer a higher yield. The dividend increase earlier this year bumped up the yield on cost by about 5%, which is about the same as the five-year average.
Realistically, the average current yield and low dividend growth rate won’t make you rich quick. But then again, the 39% payout ratio and very long history of increasing payouts won’t leave you with much worry. Still convinced this is a safe retirement play instead of a buy opportunity? 17 brokers have a median one-year target upside of about 12% ... and hey, didn’t you hear? Dividends are back in style.
General Electric (GE) doesn’t need much introduction, but here it is anyway: Based in Fairfield, Connecticut, this technology/media/energy conglomerate has products in planes, trains and microwaves, not to mention the staples of everyday life such as water, gas, light, appliances and software.
GE had a long and stable history of paying dividends for over 25 years, but you won’t see this “symbol of American business,” as Warren Buffett calls it, on any dividend aristocrat or champion list. In February of 2009, GE announced a severe quarterly dividend cut from $0.31 to $0.10, citing a precautionary move to insure liquidity. Today the company is still cautious, but has since increased the dividend payout three times to $0.15 a quarter. It’s still a long cry from the $0.31 mark in 2008, but the 3% current yield is historically in line.
Combine the recovering economic times with the 41% payout ratio and you’re starting to paint a more acceptable picture. The 1.82 beta might seem high for such a well-established company, but then again it might just be the thing the stock needs to reach the 21% expected one-year median upside held by 15 brokers.
Cisco Systems (CSCO) is exactly the type of company that could be at the helm of becoming a dividend king. Just one share invested in this San Jose-based technology firm in 1990 would have turned into 288 today; talk about growth. The future growth prospects now appear to be slowing though, as cash and short-term investments bulk up to over $7 a share.
CSCO is brand new to the dividend arena, having made its first payout in April of this year. At $0.06 a quarter, the current yield stands at 1.4%. Admittedly below the acceptable level for many income investors, this past growth company might have the ability to turn itself into a dividend growth company.
CSCO has a payout ratio under 10% and loads of cash to dispense. Despite the economic turnaround, CSCO is nearing a 52-week low and has been disappointing investors for a solid year now. Concerns are definitely present, but if CSCO can make positive strides the Price to Earnings ratio around 13 and the PEG ratio nearing 1 appear attractive. 34 brokers come to a median one-year target upside of almost 29%, which could be further supplemented by the ability to increase future dividend payouts.
From a company that just started making payments to a company that’s been around the block enough times to own it, Proctor & Gamble (PG) is nothing if not consistent. This Cincinnati-based consumer goods giant cranks out staple products under such names as Gillette, Crest, Oral-B, Downy, Tide, Bounty, Charmin and Pampers.
Having increased dividend payouts for 55 straight years, PG has more than consistency to its name: It also has pricing power. The average dividend increase for the last 10 years has been around 11%. If PG can keep this up, your yield on cost would double in just seven years. The P/E ratio around 18, along with the fact that PG is nearing its 52-week high, should give investors caution.
Buffett has been pretty pleased with his 72 million share investment to date, as it is now valued at 10 times what it was when he initiated. Analysts seem to like it as well, as 20 brokers look for a collective one-year upside of about 6%, with every one of them expecting the price to be higher in a year than it is today. But alas, PG isn’t really a growth play. The 3.1% current yield is respectable, but to be sure the true value is hidden in the double-digit dividend growth rates.
From one Buffett holding to another, American Express (AXP) looks to make a splash on the dividend scene. Buffett’s Berkshire Hathaway (BRK.B) holds over 151 million shares, resulting in a 12.6% stake. This New York-based credit card giant has the largest market cap between competitors Visa (V), Mastercard (MA) and Discover (DFS).
AXP doesn’t have the same tried and true dividend increase pattern of PG, but that doesn’t mean the dividend hasn’t been consistent. For the last 13 quarters the dividend has been held at $0.18 a quarter; before that increases had been steady since 1977. Some are concerned AXP could lose membership to competitors, but debit card legislation could boost the entire industry. Given AXP’s low 15% payout ratio, this could be an opportunity to sneak your way into a financial sector recovery while compounding dividends for the future.
20 brokers like a median one-year target upside of about 6%, although the near 52-week high always merits a second look. The 1.5% current yield needs a boost, while the P/E ratio around 14 appears appropriate.
Intel (INTC) ranks 304th in active dividend increase streaks, having increased its payouts the eight straight years. Not exactly impressive yet, but to be fair it has been a growth company in the past. This Santa Clara-based technology company has a current yield of 3% and a Price to Earnings ratio around 11.
Being somewhat new to the dividend scene, sustainability is always important. INTC's payout ratio of around 36% appears to be in line. The average 10-year dividend growth rate was around 25%, but more recently it has been in the low double digits. Just a month ago, skeptics were around each corner, but a solid earnings beat has since changed the mood; the stock price has increased 20% during that period. You’re likely using an Intel product right now and INTC appears poised to adapt to coming technology.
The quick money might be gone for the moment, but 38 brokers still agree on a one-year target upside of about 8%. Recent upgrades by FBR Capital and Standpoint Research, along with strong dividend potential, make this stock worth a look.