We continue to look for interesting dividend stocks that can help offset the significantly reduced income from fixed income instruments. Lisa Springer from Street Authority speculates about companies that are not paying dividends today but may be on the brink of making that change.
She commented: "If dividend stocks continue to outperform, then it's likely more companies will start paying dividends. Additional incentives come from retiring baby boomers, who will most likely switch to income-generating investments rather than riskier growth stocks. Given this rosy outlook for dividend stocks, there are many companies not paying dividends now that will possibly ponder commencing payments soon."
We have already stated that companies may pay dividends to boost interest in the company and it could be a danger sign. However, Lisa screened for those that were fundamentally strong and initiating dividends is not a sign of desperation.
Her filter was:
- Companies that have good earnings, abundant cash, strong cash flow and little long-term debt
- Companies trading at low price-to-earnings (P/E) and price-to-cash flow (P/CF) ratios
From that filter she picked her top three
- Tech Data Corp. (NASDAQ:TECD) a giant distributor of IT products.
- $24 billion sales (12% increase)
- EPS improved 22% to $3.37
- $900 million of cash. T
- Long-term debt $61 million
- Trades at just 10 times its forward earnings.
- Western Digital Corp. (NASDAQ:WDC) Hard drive manufacturer
- Averaged 17% sales growth and 12% earnings growth in the past five years
- $3.9 billion in cash
- $231 million of debt
- Trades at only seven times cash flow
- EMC Corp. (NYSE:EMC) Data storage and information security
- $20 billion in revenue (18% increase)
- Earnings increased 24% to $3.4 billion
- $6.3 billion of cash
- $3.4 billion of debt
- Trades for 14 times cash flow
Well these are strong companies in the IT sector so we have a double problem of a small number in a single market so there will be volatility but worth measuring to see whether these are companies to consider adding to a long term portfolio -- whether or not they add dividends. We will compare them with our broadly diversified dividend bearing ETF portfolio.
|Asset||Fund in this portfolio|
|REAL ESTATE||(NYSEARCA:ICF) iShares Cohen & Steers Realty Majors|
|FIXED INCOME||(NYSEARCA:TIP) iShares Barclays TIPS Bond|
|Emerging Market||(NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF|
|US EQUITY||(NYSEARCA:DVY) iShares Dow Jones Select Dividend Index|
|US EQUITY||(NYSEARCA:VIG) Vanguard Dividend Appreciation ETF|
|INTERNATIONAL EQUITY||(NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx|
|High Yield Bond||(NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd|
|INTERNATIONAL BONDS||(NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond|
- 3 Cash-Rich Stocks Ready to Start Paying Dividends -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||1%||0%||14%||10%||77%||8%||61%|
|3 Cash-Rich Stocks Ready to Start Paying Dividends||22%||8%||23%||41%||127%||14%||35%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||4%||1%||18%||21%||133%||3%||12%|
I have cheated in the sense that I have already looked at the chart and they show what the Sharpe ratios indicate -- that despite strong returns, the risk associated with this selection is high. We have already stated that with only three equities in one market segment, you are going to see additional volatility. The cyclical nature of the IT/Semiconductor business is there for everybody to see.
Despite this, the returns are there if they can be hedged with stocks that have different markets and behaviors.
Three-Month Chart One-Year Chart Three-Year Chart Five-Year Chart
This clearly shows how cyclical IT and high tech spending is. We go from boom to bust and have to ride that wave.
Lisa's final comment was: "All of these stocks have strong earnings and more than enough cash and cash flow to support dividends. These three companies are strong candidates, but my top choice is Western Digital because the company may come out of the gate with the highest yield, followed by Tech Data and EMC."
I have no idea whether she is right. Her logic is sound but who knows whether management will decide to initiate dividends. I think it would be good if it did as the businesses appear to be on strong footing.
This is certainly a set of equities to watch.
Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.