One of the biggest challenges for most investors is finding a stock that can help to increase their overall returns and provide them with income. The problem that they will encounter is finding a company that has the ability to pay dividends. This is because a number of corporations will often provide shareholders with small dividend payouts over a limited amount of time.
Once this occurs, the firm may continue to pay this amount until there are changes in the underlying financial condition. At which point, management will either reduce or eliminate the dividends entirely. This is troubling, because it can have a negative impact on the total return of the portfolio (which will hurt the firm’s ability to reach a number of financial objectives).
Avoiding these kinds of situations requires finding companies that have the ability to pay their dividends in the future. Several firms that meet this criteria include: Cisco Systems (NASDAQ:CSCO),Vodafone (NASDAQ:VOD), General Electric (NYSE:GE), Microsoft (NASDAQ:MSFT), Waste Management (NYSE:WM) and Intel (NASDAQ:INTC). This article analyzes these stocks for their ability to pay dividends. In this article, I am not advancing these names on a valuation basis.
To determine the strengths of dividends with each firm requires using tools that have been shown to be effective in analyzing these figures. The way that this will be accomplished is by focusing on the dividend growth rate, the payout ratio and the competitive advantages. Once this takes place, is when it will be clear as to how this will provide shareholders with stability. This is when they will be able to reduce the overall amounts of volatility.
Cisco Systems is mainly focused on the sale of networks, routers and switches that are used to maintain and increase the bandwidth of internet service providers (ISPs). These companies then offers customers better solutions for surfing the web and using portable devices (such as smart phones). Furthermore, Cisco markets various security related products (i.e. firewalls) to clients and it is providing their customer with support services. The combination of these factors helped the firm to be able to benefit from the increasing demand for IT services and related products.
Over the course of time, this has allowed the corporation to build up cash reserves of $27.54 billion. To provide investors with more of a consistent return, management has announced about one year ago that the firm is going to be paying a regular annual dividend of $0.24. This is a dividend yield of 1.3%. There is no dividend growth rate for the company. While the dividend payout ratio for the firm is 13.5%.
These different figures are important, because they are underscoring how Cisco has been refocusing on their core markets. In the last year, this strategy has helped the company to consistently beat analysts’ earnings estimates. As a result, 2012 will more than likely see consistently increasing dividends. The reason why is because the company is focusing on offering shareholders something more than growth. While Cisco can maintain a robust dividend, I cannot stand behind the stock for significant price appreciation.
Vodafone is focused on providing 370 million customers around the world with fixed, mobile, broadband and messaging services. Recently, the firm announced that they have rolled out 4G LTE to some of their largest customers. The firm is currently paying a dividend of $.97 or 3.60%. In the past year Vodafone experienced a dividend growth rate of 103.7% and a dividend payout ratio of 45.3%. A major competitive advantage for the company is a 45% stake in Verizon Wireless. In 2012, this will help the firm to be able to maintain or increase the dividends even more.
General Electric is a large multinational corporation that is involved in a number of different segments, to include: Aviation, Energy Infrastructure, Transportation, Home/Solutions and Real Estate. Until 2009, this helped to provide GE with balance, as the management has been consistently paying and increasing their dividends going back to 1962. However, during the recent downturn the dividend was reduced from: $1.24 to $.40. Since that time, they have raised this amount to $.60 or 3.70%. This is a dividend growth rate of 20.0% and a payout ratio of 35.1%.
One of the biggest advantages for the company is that earnings have been consistently rising over the last two years. This has allowed management to once again raise the dividend payout. In 2012, this will help GE to maintain its dividends. The reason why is they are seeing an improvement in their business model. This has allowed the firm to begin raising its dividend.
Microsoft is focused on the development and marketing of different types of software products and services. These include: operating systems (i.e. Windows), search engines and video game technology (the X Box). This has helped the firm to accumulate over $55 billion in cash. Since 2003, Microsoft been consistently paying and increasing their dividends with this sitting at $.80 or 3.10%. The dividend growth rate for the firm is 45.4% and the payout ratio is 29.0%. The biggest competitive advantage for Microsoft is that the firm is actively competing in these segments. This has helped to increase their overall bottom line numbers. In 2012, this will cause the total amount of the dividend to rise.
Waste Management is focused on the disposal and recycling of trash for: residential, commercial along with industrial customers across North America. The company currently has over $252 million in cash and they are paying a dividend of $1.36 or 4.30%. The dividend growth rate is 7.93% and the payout ratio is 65.85%. The biggest competitive advantage of the firm is that they are in an industry that is always in demand. In the next year, this will lead to an increase in dividends.
Intel is involved in the design and manufacture of integrated circuits along with silicon based chips. These microprocessors are used in mainframes, desktops, laptops, notebooks and consumer electronics. The firm is currently paying a dividend of $0.84, or 3.40%. While the company’s dividend growth rate is 33.2% and the payout ratio is 36.3%. The biggest advantage that the Cisco has is the ability of managers to help the firm maintain the lead in key markets and segments. For the dividends, this translates into higher payouts. As a result, this is a sign of how the dividend payout will remain consistent and it will more than likely increase in the future.
What all these companies are showing is how dividend payouts will vary in the future. This is because a corporation’s business model will have an impact on how much it is paying to shareholders. However, each one of these organizations has the ability to increase the underlying profit margins for the firm dramatically. In 2012, these areas are a good way for investors to provide their portfolios with income.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.