My dog, Ringo, is a country dog. As such, he is easily bored. One of his favorite pastimes is chasing the odd car or truck that comes down our road. He enjoys this pastime more than just about anything else. No matter how hard I try, I cannot break him of this habit. Sometimes I wish that I could reason with him. You know, look him right in the eye and talk to him and have him comprehend what I am saying.
I'd ask him, "Ringo, why do you always want to chase cars?" I would hope that he could articulate his reasons and help me to better understand the addiction that he has. Then I would ask him, "Ringo, if you ever caught one of those cars, have you ever considered what you would do with it?" I am quite sure that he would have absolutely no idea.
Ringo chasing those cars is a lot like some investors who chase dividend yields. Like my dog, I'd like to ask them why they do it and what they hope to achieve with that strategy if they caught the yield that they were after.
Now before anyone gets all excited, I am not knocking the notion of dividend growth investing as I am a dividend growth investor myself. What I am talking about is the addiction to stocks that pay dividends that are so attractive on the surface that they are can be hard to resist. Just like Ringo seeing those cars, you see that dividend or something that someone writes about the stock and the next thing you know, you are running down to your computer to place an order. Have you taken the time to do your due diligence--or are you chasing cars?
High Yielding Companies
1. Century Link (CTL)
Century Link has grown through a series of acquisitions from a small rural wireline carrier to the third-largest telecommunications company in the U.S. The company provides local access, long-distance service, broadband access, business telecom services, and fiber transport to residential and business customers in 37
states, mostly in the South, Midwest and Western U.S. (Argus Research)
CTL is a telecommunications company that has increased dividends every year for the last 37 years. The stock recently has traded at $33.37 a share, the dividend is $2.90 a share, and that's a yield of 8.7%. The dividend payout ratio for CTL is 123%. YTD CTL is down 27%.
2. Old Republic International (ORI)
ORI is an insurance company that has increased dividends every year for the last 30 years. The stock recently traded at $8.79 a share, the dividend is .70 a share, and that's a yield of 8.0%. YTD ORI is down 33%.
3. Pitney Bowes (PBI)
PBI, is the world's largest maker of mailing systems, also provides production and document management equipment and facilities management services.
PBI has increased dividends every year for the last 29 years. The stock recently traded at $18.78 a share, the dividend is $1.48 a share which is a yield of 7.9% The dividend payout ratio for PBI is 89%. YTD PBI is down 18%.
4. Cincinnati Financial (CINF)
This insurance holding company markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.
CINF has increased dividends every year for 50 years. The stock recently traded at $25.45 a share and the dividend was 1.61 per share for a yield of 6.3%. The dividend payout ratio is 88%. YTD CINF is down 17%.
5. Frontier Communications (FTR)
After acquiring wireline assets from Verizon Communications in mid-2010 that more than doubled its size, FTR provides wireline communications services, including voice services to 5.5 million customers in rural areas and small and medium-sized cities in the U.S.
FTR recently traded at $6.28 a share, paid a dividend of .75 per share which is an 11.6% yield. The payout ratio for FTR is 469%. YTD FTR is down 35%
6. Windstream Corp (WIN)
This company was formed through the July 2006 combination of former Alltel wireline assets and Valor Communications and continues to grow via acquisitions. It provides telephone service to 3 million lines in rural markets.
WIN recently traded at $12.30 a share, pays a dividend of $1.00 per share, which is a yield of 8.1%. The payout ratio is 179%. YTD WIN is down 12%.
7. RR Donnelly and Sons (RRD)
R.R. Donnelley, the largest U.S. commercial printer, specializes in the production of catalogs, inserts, magazines, books, directories, and financial and computer documentation.
RRD recently traded at $13.89 a share with a dividend of $1.04 per share or a 7.5% yield. The payout ratio is 173%. YTD RRD is down 18%.
I tend to be more of a "sweet spot" dividend growth investor. I like companies that are in that 3%-5% yield range. As most dividend growth investors, I like to have companies that raise their dividends annually, and I like the increases in those dividends to be larger than the rate of inflation. Stocks that meet this metric for me are companies like KO, JNJ, KMB, MCD, MO, and ABT for example. Lower dividends that these examples, but with great dividend growth rates.
When you look at the fundamentals for these companies, it is hard to make a case for chasing the yields. From my personal perspective, it would seem that there would be more favorable companies to chase after, than these particular ones. I do see a lot written about these companies and I have always wondered about DG investors who buy these stocks and ask myself "why?" When you compare the fundamentals on the telcoms, and you compare WIN, CTL, and FTR to T or VZ for example, I think that T and VZ present a more convincing case for ownership.
I have to admit that sometimes I feel a certain synergy with my dog Ringo and when I see a car coming down the road, I sometimes think about chasing it. I've always wondered why he gets so much joy in running after them. The inclination to chase dividend yields is not one I share with my dog's penchant for chasing cars, however. The 5th DG Commandment is "Thou Shall Not Chase Yields."
Like my hypothetical questions to Ringo, "Why do you chase cars" (yields) and "If you ever caught one have you considered what you would do with it?"