One the tactics that some of the most successful investors are using is to purchase companies that are paying large dividends. The reason why is because of the belief that these stocks are more established based upon the fact that that they have to pay investors some kind of dividends. Those companys that can continually do this have entered a mature stage of growth. This occurs when the stocks have the possibility of being more stable and can help to increase the overall returns in the portfolio. This will reduce the total amounts of volatility and it will provide shareholders with an additional form of income.
The problem is that a number of investors will take these ideas and apply them to any kind of company that is paying strong dividends. This is troubling because it means that if the company is not financially sound. The dividends could be reduced or eliminated (which increases the amounts of volatility). To determine the companys that are the strongest requires evaluating the dividends of those stocks that have been paying high amounts over the last year. This can be accomplished by looking at several stocks that fit into this category including: Frontier Communications (NASDAQ:FTR), Vodaphone (NASDAQ:VOD), Chimera Investment (NYSE:CIM), Windstream (NASDAQ:WIN) and First Niagara Financial (NASDAQ:FNFG).
Frontier Communications is currently yielding 14.60%. The company has a payout ratio of 3.40 and total amount of cash of $205.80 million. The profitability of the company includes profit margins of 2.88% and operating margins of 19.47%. These elements illustrate how the dividends of the company will more than likely fall in the future. Frontier shares already showed some anticipatory weakness in December, hitting another 52-week low. The reason why is because the company is paying larger amounts in dividends to shareholders than they have in actual growth or cash. Moreover, the sector has been seeing a similar trend as there was an increase of sales in purchases from large customers. Once these orders were completed, the company offered stockholders larger dividend payouts. Now the company is seeing declining sales volumes. While at the same time there is an agreement to pay down $575 million in outstanding debt. This means that over the next year there is a very realistic possibility that Frontier Communications will suspend or cut their dividends.
Vodaphone is yielding 3.50%. The company has a payout ratio of .122 and total amount of cash of $12.05 billion. The profitability of the company includes profit margins of 15.18% and operating margins of 14.49%. These figures illustrate how the company can maintain and increase its current dividends. The reason why is because the company is paying 12.2% of the earnings out to shareholders in dividends. At the same time the large growth rates of 14% to 15% are a sign that the company is continuing to add to the overall bottom line numbers. This means that the company has been seeing increasing market share and is aggressively expanding into new regions. These elements illustrate that the company could realize a 55% increase in earnings over the next two years. As a result the dividends will more than likely stay the same or rise in the future.
Chimera Investment is yielding 17.10%. The payout ratio is .88 and the total amounts of cash are $9.82 million. The profitability for the company includes profit margins of 90.42% and operating margins of 90.53%. These elements illustrate how the company is paying out the majority of the earnings to shareholders in the form of a dividend. However, the high levels of profitability are helping the company to maintain these kinds of growth rates. Moreover, the low interest rate environment will help the company to see consistency in these numbers over the next year. Once this takes place and interest rates begin to increase is when the company can see these figures start to decline. As a result the dividend yields should remain stable until 2013.
Windstream is yielding 8.60%. The profitability ratio is 1.38 and the total amounts of cash are $34.30 million. The profitability of the company includes profit margins of 6.42% and operating margins of 36.24%. These figures indicate how the company’s dividend is unstable. This is because the company is paying out more to shareholders than they are making and they have limited amounts of cash. At the same time the growth in profits and sales (i.e. the operating margins) is highlighting how these amounts are considerably higher than the actual earnings of the company. Furthermore the industry experienced growth rates of 8.0% last year. In 2012 these numbers are expected to decline to 6.0%. This is significant because it shows how the total amounts of dividends will more than likely decline in the future.
First Niagara Financial
First Niagara Financial is yielding 7.10%. The profitability ratio is .653 and the total amounts of cash on hand are $386.69 million. The profitability of the company includes profit margins of 16.40% and operating margins of 42.99%. These figures indicate that the company can be able to maintain the dividend yield. This is because the profitability ratio, large amounts of sales and growth rates are very high in comparison with the industry average of 13.80%. Moreover the company has been acquiring weaker competitors (i.e. HSBC) and the Federal Reserve is focused on improving the strength of the real estate market. This shows how First Niagara will more than likely maintain and increase dividend yields in the future.
Clearly the above stocks illustrate how dividend yields will vary for each company based on changes in the business model and the strength of the sector. In the case of Frontier Communication and Windstream these amounts will more than likely fall. This is because these companys do not have the growth rates, earnings or economic environment to support these figures. While the Vodaphone, Chimera Investment and First Niagara Financial will continue to increase or raise these amounts. This is due to the fact that all three companies have rising earnings and are seeing strong support from the current economic environment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.