The Best Dividends At Your Local Grocery Store

by: Jefferson Starship

The Dow Jones Industrial Average has been on a wild ride since the middle of July, when Standard & Poor’s lowered America’s credit rating. It began with a 2,000 point drop off of a high of around 12,700, which is 15.7%. Since then there have been five up or down swings of more than 500 points. This has wreaked havoc on the portfolios of institutional and individual investors alike.

However, this volatility helps to enforce the fact that stocks can be bought at a discount if you wait them out long enough. No one likes picking up a strong stock backed by excellent fundamentals only to see the Dow get crushed the next day, but it happens to everyone. That’s why, if nothing else, you must have conviction in your picks. One way of supporting this conviction is by having faith in the underlying industry, and that is where I reach my point. People need to eat, and in a recession we tend to see the trading down of goods. This could mean that people eat out at nice restaurant with less frequency and go to fast-food restaurants, or perhaps they go shopping and learn how to cook. A home-cooked meal is incredibly less expensive than dining out, and we live in an age where home cooking is at its easiest.

That being said, some of the food manufacturers are still trading at a discount and thereby offering superb yields for an industry that could arguably be deemed defensive. Sellers on the other hand have been doing either okay, in the case of two, or great, in the case of two others. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are each fairly low priced right now, but their yields and growth potential do not warrant a second look. Costco (NASDAQ:COST) and Whole Foods (NASDAQ:WFM), however, have been performing despite the market volatility and are trading near 52-week highs. So it’s interesting that the stocks of the products they sell have not caught up, and of course it could be argued that their margins have been diminished with rising inputs costs, but those will level out in time and you’ll be happy you took advantage of these yields; as followed (and listed in order by yield):

B&G Foods (NYSE:BGS) – B&G has the highest yield on this list at 5%, and going against everything I just mentioned, the company has had a decent year through three quarters. In March its share price jumped up from $14 to $18, climbed to $21 and has since settled in the $16 to $17 range. But this is all on top of the fact that B&G was at $10 a year ago. More on all of that can be found here. B&G is the producer of such brands as Ortega (tacos and such), Cream of Wheat, all of Emeril’s products, and a number of other product lines. A note of caution is that its dividends do not increase annually. The payout ratio is currently at 75%, so the high dividend yield should be sustainable.

ConAgra Foods (NYSE:CAG) – ConAgra’s best brands are Banquet frozen meals, Orville Redenbacher’s popcorn, Swiss Miss, Healthy Choice, Slim-Jim, Egg Beaters, and Hebrew National. Basically this company has products all over the store, and big names to boot. ConAgra is about 9% off a 52-week high with a P/E of only 13.7. More importantly, a few days ago it raised its dividend and is now yielding 4%, making this stock-- in my opinion-- the smartest play on this list, especially with a payout ratio of only 47%.

H.J. Heinz (HNZ) – Talk about a company with a wide ‘moat’ around its top product. I’d be willing to bet that most people could not name another brand of ketchup. Heinz also makes a number of other condiments and products, such as Ore-Ida fries, Smart-Ones, and Bagel-Bites. Its price hit a high of $55 this year and is currently at $49.50. This has a yield at 3.8% after a 6.7% hike in July; with a payout ratio of 61%. Heinz has a dividend history of rising annually, but was frozen for 8 quarters in 2008 to 2010. Heinz’s P/E is on par with B&G at 16.

Kraft (KFT) – Kraft has not done so well in the last week, falling from levels near its 52-week high. Apparently the market as a whole has had a greater effect than the news of its upcoming split into Kraft Foods and Kraft Snacks. Kraft has an incredible number of brands under its belt and there’s no way that even listing a few would give an accurate representation of its range; but for good measure, my favorites are Marconi & Cheese, Oreos, Wheat Thins, Maxwell House, and Crystal Light. It is also one of the largest stocks on this list and only one of two on the Dow. It is currently yielding 3.5%, paying out 67%, but it does not rise annually, so you would probably be looking for capital appreciation on this one.

Dr. Pepper Snapple (NYSE:DPS) – Quite frankly, I’ve never been a fan of this stock because it has to constantly battle the two giants found below, but since the inception of its dividend at the beginning of 2010, the payout has more than doubled. Of course, it would be irrational to assume that this rate would continue, but it is yielding 3.4%, on a payout ratio of 45%, at its current price of $37.24. Graphically speaking, its chart is not promising and it is 15% below highs and its P/E, 15.8, is in-line with Pepsi but higher than Coke’s.

PepsiCo (NYSE:PEP) – As a DRIP investor in Pepsi I can tell you that the last few months have been rough (down 15%). But, it has also brought the yield on its dividend up, which has been rising annually since the mid-70’s to 3.3%, at a payout ratio of 50%. That’s not bad considering the company’s history and brand reputation. Also note worthy is the fact that half of PepsiCo’s revenue is from Frito-Lays, so it is much, much more than a beverage company­–one that also owns Tropicana orange juice and Gatorade. I personally think Pepsi is bound to jump back to the $66 range.

Kellogg Company (NYSE:K) – Despite the inherent lack of nutritional value, people continue eating cereal every morning. Kellogg also owns Pop-Tarts, Nutri-Grain, and Eggo, among other brands. The stock is currently priced around $53 and appears to still be within an upward trend, technically. The company does raise its dividend annually, with mid-September being the most recent. Kellogg is currently yielding 3.2% with a payout ratio of 48%.

General Mills (NYSE:GIS) – General Mills has recently fallen to $38 a share and is yielding 3.2%. The payout ratio on the dividend is only 44%, and the stock went ex-div on October 5th. General Mills’ dividend did drop two years ago, but the company seems committed to retaining its current level and watching it grow. The stock’s P/E is mediocre at 14.5 and the company boasts a wide range brands like Yoplait, Betty Crocker, Jolly Green Giant, and Pillsbury, among others.

Coca-Cola (NYSE:KO) – Coke is the most established brand on this list by leaps and bounds, and the largest at $150 billion in market cap. It is only yielding 2.8%, but you would also be getting a company that has increased its annual dividend for the last 48 years and with the lowest payout ratio at 34%. Coke has the widest-‘moat’ in the beverage sector and is relatively cheap right now, down 8% in just a few weeks. Coke offers the best chance at stability and safety in this volatility.

The preceding nine stocks should cover the majority of your grocery store purchases. When combined they offer an astounding collection of familiar items, all trading at particularly nice yields right now. When the opportunity to purchase dividends stocks at a discount arises, long-term value investors should be buying them up just like you would be buying their food at the grocery store.

Disclosure: I am long PEP.