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I recently published two research-based articles on high-yield, low-payout stocks outperforming the overall market. One interesting idea from this research came from Robert Ibbotson, a Yale finance professor. He found that illiquid stocks tended to outperform more liquid stocks (Source: Jackass Investing by Michael Dever). He offered three explanations for this:

  1. Investors prefer liquid stocks to illiquid stocks; therefore they pay a premium for liquidity, making those stocks overpriced.
  2. As the supply of capital grows, all stocks become more liquid, but the least liquid stocks receive the greatest relative benefit.
  3. More popular stocks attract more interest and attention, which results in less chance to score outsized future price gains.

Illiquidity was defined in relative terms as the average trading volume for a stock divided by its outstanding shares. Therefore it does not just mean small-cap stocks with low floats. I modified this definition by multiplying by 365 to create an annual turnover percentage, which I felt would be easier to understand and compare.

Screening Process

I started with the CCC list of stocks (about 500) and added columns containing the average daily volume and shares outstanding. The annual turnover percentage was calculated as: Turnover % = (Avg_Vol / Shares_Outstanding) * 365.

I proceeded to sort the list from lowest to highest, and then took approximately the top half by setting a cutoff value of 200%. I'm most curious about the stocks with lower percentages, but didn't want to be too exclusive. I then screened out stocks with payout ratios above 60%. Next, I focused on stocks from the Consumer Discretionary sector that had double-digit projected earnings and dividend growth rates. This process yielded the following stocks.

Name
(Yrs of consistent div growth)

Ticker

Yield*

Annual Turnover

Payout Ratio*

Est Earnings Growth

1-YR DGR

3-YR DGR

Acme United (8)

(NYSEMKT:ACU)

2.7%

37%

27%

17.9%

19.0%

13.7%

Tim Hortons (7)

(NYSE:THI)

1.6%

56%

30%

11.9%

36.7%

24.4%

Nike (10)

(NYSE:NKE)

1.3%

182%

27%

17.8%

10.7%

9.7%

VF Corp (39)

(NYSE:VFC)

1.9%

185%

33%

15.2%

7.4%

3.9%

McDonalds (35)

(NYSE:MCD)

2.9%

188%

48%

10.3%

11.9%

15.9%

Genuine Parts (56)

(NYSE:GPC)

3.1%

192%

50%

8.2%

10.4%

5.5%

Data with * from Yahoo Finance as of March 22, 2012. Other data from March CCC list.

The Stocks

  • Acme United Corp develops and markets cutting, measuring, and safety products to the school, home, office, hardware, and industrial markets. It has had a nice run-up over the last decade, but it has not always increased its dividend once every four quarters. ACU has a low beta of 0.39, operating cash flow covers the dividend, and it has plenty of cash on the balance sheet.
  • Tim Hortons develops, franchises, and operates quick service restaurants primarily in Canada and the United States. Its price has gone almost straight up since March 2009, and it is well above its January 2008 highs. THI also has a low beta of 0.5, operating cash flows handily cover the dividend, and the firm has been accelerating its stock repurchases the last 3 years. While its current yield is relatively low, THI has the strongest dividend growth rate of the stocks in this list.
  • Nike designs, develops, and sells footwear, sports apparel, and equipment worldwide. It has an impressive long-term performance record despite market and economic turmoil. Like THI, cash flows easily cover the dividend and NKE has been repurchasing its stocks aggressively ($1.5B spent last fiscal year, and on-track for over $2B this year). NKE has been raising dividends 10%+ annually. After its recent run-up, the stock may be richly priced, but based on its history; this may not matter in the long run.
  • VF Corp also designs, manufactures, and sells footwear, outdoor gear, apparel, and accessories, including brands such as: The North Face, Timberland, Wrangler, and Lee. Its 5-year performance is close to that of NKE, and VFC has had strong long-term performance relative to the S&P 500, but NKE's was higher. VFC offers a higher yield than NKE, but lower dividend growth. Most of its positive cash flow comes during the December quarter, but it easily covers the dividend for the year.
  • McDonalds is the leading fast-food company in the world and one of the top-recognized brands. Despite being a large, mature firm, MCD continues to deliver 10% earnings growth and over 10% dividend growth annually. MCD has had an amazing run-up over the last 5 years, and with its 0.18 beta, it has held strong during market drops. MCD's cash flows readily cover its dividend and the firm has aggressively repurchased over $2B of its stock in each of the last 3 years, over $3B last year. Valuation is a concern, though it is off from its $102 high.
  • Genuine Parts distributes automotive and industrial replacement parts and electrical materials in the U.S., Canada, and Mexico. Major markets include the automotive aftermarket (repair shops, dealers) and retail customers through NAPA stores. This firm has the longest dividend growth history of the group. Its maturity is also reflected in its relatively high yield of 3.1% and 50% payout, and its lower projected earnings and DGR rates. GPC's chart shows a steady upward climb, though with a few significant declines during recession periods.

Low-Yield, Low-Payout

As observed in the table above, these CCC stocks have a medium or low yield, based on the cutoffs that I established in my previous payout-yield article, and most fall into the low payout category (<33%). Each firm has a record of consistently raising dividends, with all but VFC and GPC delivering almost 10% or higher DGR over the 1-YR and 3-YR periods. With low payout ratios, there is continued room for dividend growth. Historically low-yield, low-payout stocks tend to perform very well over the long run. These stocks have all delivered total returns that beat the S&P 500 (NYSEARCA:SPY) over the last 1, 3, 5, and 10-year periods, except for ACU, which suffered large declines in 2005 and 2008.

What I Like

I don't own any consumer discretionary stocks at the moment, so I created this list to generate some ideas for myself. Of these stocks, I have been following NKE and MCD for awhile, and would like to acquire both if they come off of their highs a bit more. THI also interests me, given its high DGR, stock buybacks, low payout, and low turnover. Note that it is a Canadian firm, so buy it in an IRA to avoid foreign tax withholdings. As a total return investor, I don't mind its low current yield. I'm looking for longer-term total performance, and if THI continues to raise its dividend aggressively and buyback shares, I would expect to get both a higher yield and price appreciation.

Source: 6 Consumer Discretionary Stocks With High Dividend/Earnings Growth And Low Payout/Turnover