By Brian Tracz
The threat of dividend cuts is a real possibility in the event of a downturn in the economy. For instance, there is some concern that Waste Management, Inc. (WM), the "old iron-sides" for dividend investors, might see deteriorating earnings in the short term. Though the company has a "stated goal" of remaining in the upper quartile of the Fortune 500's dividend yield, the company has had stagnant earnings and capex diverted towards maintaining its waste collection infrastructure. If Waste Management does not grow earnings and wishes to remain a dividend mainstay, then its share price will likely slump a few dollars.
In this article, we review companies that have had consistent earnings growth and consistent dividend disbursements - a mix of price stability and dividend stability. We are looking for stocks with at least a 10-year history of 5 percent earnings growth coupled with a 3 percent dividend yield or higher - essentially, stocks that blow Treasury issues out of the water in the present environment. Here's what we found.
Alliance Resource Partners
Coal producers have been out of favor for a while because of declining coal prices. However, Alliance Resource Partners, L.P. (ARLP) has a 6.7 percent dividend yield, a yield that has not fallen below 4 percent in the past decade. Shares are trading at 8.9 times forward earnings, which is below the energy sector's average multiple of 11 times (granted, coal companies probably deserve a lower multiple in this market).
The company operates 10 underground coal mines on the eastern coast of the United States, in addition to a new mine in Indiana. The company's net profit margin of 21 percent is higher than that of CONSOL Energy Inc. (CNX), a major competitor, which has net profit margin of 10 percent. In all, its strong balance sheet and high dividend make Alliance Resource Partners, L.P. an attractive dividend pick with strong fundamentals, despite the difficulties in its industry.
TOTAL S.A. (TOT) is an integrated oil and gas company based in France. The company's shares are trading at 8 times forward earnings, which is cheap relative to the broader energy market. The company's 5.6 percent dividend yield is supported by strong financials; the company's debt as a percentage of total capitalization was 23.5 percent in 2011, a figure that has decreased over the past three years.
S&P's debt rating for Total S.A. is AA-. Over the past 9 years, annual net income growth has averaged 9.2 percent, which, along with current projects in Nigeria, Yemen, Qatar, and the Barents Sea, ought to support the company's consistent growth.
Universal Health Realty Income Trust
A stock that one commentator considers a "dividend champion," Universal Health Realty Income Trust (UHT) has a multi-decade history of distributing a significant quarterly dividend. The trust presently has a 5.4 percent dividend yield, and the quarterly dividend was recently increased.
REITs are generally cornerstones of many income investors because they are required to disburse 90 percent of their income as dividends. Lousy yields on treasuries and a third round of quantitative easing in the United States, along with potential for significantly increased inflation, will erode nominal returns on classic income investment securities.
This makes a company like Universal Health Realty Income Trust, which has grown its net income by 11 percent annually over the past five years, a more appealing option as an income investment.
Eli Lilly and Company
A pharmaceutical company with a market cap over $50 billion, Eli Lilly and Company (LLY) boasts a drug pipeline that could yield up to next 66 new medicines over the next few years, 12 of which are in Phase III trials. The company's quarterly dividend, currently yielding 4.2 percent, has been disbursed consistently for over two decades.
Drug companies are less exposed to broader economic conditions, though there are significant inherent risks in drug development. Zyprexa came off patent last year, and Cymbalta will lose patent protection in 2013. Though this might add a measure of price instability to Eli Lilly & Co.'s shares, it seems a fair exchange for long-term prospects for growth and consistent income via dividend disbursements.