10 Dividend Champions: Lowest Yields, Highest Total Returns

by: Chuck Carnevale

The importance of dividends cannot be disputed or denied. To paraphrase Will Rogers, dividends provide investors both a return of and a return on invested capital. Consequently, in addition to augmenting returns, dividends also simultaneously reduce risk. Each time a dividend is paid to an investor, the investor has less capital at risk equal to the amount of the dividend paid. As an aside, this important point is often left out when people are calculating yield on cost. Even though this return of capital is a great benefit, it also can require a new investment decision if the investor is not spending the dividends.

One way to handle this is to only invest in dividend paying companies that offer a DRIP (dividend reinvestment program) program. This is a legitimate strategy that takes advantage of the benefits provided by the concept called “dollar cost averaging.” If the price of the stock you are reinvesting in is high, your dividend will buy fewer shares of expensive stock, and conversely, if the price of the stock you are reinvesting in is low, your dividend will buy more shares of the cheaper stock. This is a proven strategy that works in the long run.

Another option, and one that we prefer, is to collect your dividends with the objective of selectively reinvesting them in companies that you believe are the most opportune in your portfolio. In other words, use the dividend income you receive to purchase the stocks that you believe offer the best value and highest future returns. This strategy requires more effort and research, but can enhance long-term returns, if you're disciplined. This is critical, because a significant advantage of a DRIP program is discipline.

On the other hand, it's also important to point out that dividends are only one factor to consider when designing or managing an investment portfolio. If your investment objective is income, then dividends can, and should be, one of your primary considerations. However, if your objective is long-term growth of capital, then dividend paying stocks may not be your best choice. This is not to say that dividend paying companies would not still be a good choice, they just may not be your best choice. Your best choice is defined as the one that would make you the most money over time. Faster earnings growth will normally accomplish this, however, there is more risk taken.

As a general rule, there is a strong correlation between earnings growth rates and the level of dividends paid, if any. The higher the rate of earnings growth, typically the lower the payout ratio will be. This is partly due to the fact that fast-growing companies need to reinvest their capital to fund growth. Over time, as companies get bigger, growth tends to slow and so does the companies’ need for capital lessens. This is typically the time where companies will institute a dividend in order to compensate their shareholders for a slower earnings growth rate. Of course, it should be noted that there are exceptions to every rule, including this one.

The 10 Lowest Yielding Dividend Champions

The following analysis through the lens of our F.A.S.T. Graphs™ research tool reviews the 10 lowest yielding dividend champions. In our previous article we covered the 10 highest yielding dividend champions where we discovered mostly low total returns. In fact, most of the returns we did find came from dividends, as there was very little capital appreciation due to low earnings growth and valuation discrepancies.

Therefore, as you might guess, you will find that 7 of the 10 lowest yielding dividend champions had double-digit historical earnings growth, or very close to it. As a result, these lower yielding companies generated higher total returns than their higher yielding counterparts. However, you also should note that a significant greater portion of their total returns is attributed to earnings growth and reasonable starting valuations. It's also been noted that both of these articles covering highest and lowest yielding dividend champions review the same historical holding period of 1997 to current.

A brief description of each company will precede each of their graphs taken directly from each company's website. However, we will add brief commentary on each graph in order to assist the reader in interpreting what they're looking at. However, for the most part we will let the graphs and the accompanying calculated performance results speak for themselves.

Summary and Review

Our first F.A.S.T. Graphs provides a statistical summary of the 10 lowest yielding dividend champions we are reviewing. Note that when the current PE column is written in red that this indicates overvaluation. Since valuation matters a great deal, this would indicate caution for those considering purchase, and further caution for any investor who already holds one of these example companies.

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H.B. Fuller Company (NYSE:FUL)

“H.B. Fuller Company is a leading worldwide solution provider of adhesives, sealants, paints and other specialty chemicals. The company's products and services have diverse application, ranging from consumer to durable goods.”

From our price-earnings correlated F.A.S.T. Graphs™ below on H.B. Fuller Company we discover a very strong long-term correlation between stock price and earnings growth. Additionally, we discover periods of cyclicality with earnings results.
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H.B. Fuller Company has only modestly outperformed the S&P 500. Even though the company did increase its dividend every year, during periods of low earnings growth the increases were quite modest. Also, their total cash dividends were less than the S&P 500.
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Tootsie Roll Industries (NYSE:TR)

Tootsie Roll Industries, Inc. is America's favorite candy company, manufacturing and selling some of the world's most popular confectionary brands. Tootsie's brands include some of the most familiar candy names: Tootsie Roll, Tootsie Pop, Charms Blow Pop, Mason Dots, Andes, Sugar Daddy, Charleston Chew, Dubble Bubble, Razzles, Caramel Apple Pop, Junior Mints, Cella's Chocolate-Covered Cherries, and Nik-L-Nip.”

Tootsie Roll Industries has the second highest yield of this low yielding group, but also the lowest earnings growth rate. Although considered a very high quality company with very little debt, Tootsie Roll Industries’ record of earnings growth leaves much to be desired.

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When reviewing the calculated performance results of the above price and earnings correlated F.A.S.T. Graphs™ on Tootsie Roll Industries there are a couple of important occurrences to point out. There was a time prior to 1997 when Tootsie Roll Industries Inc. was an above-average growing enterprise with a low dividend payout ratio. More recently you will note that its dividend increases were more a function of a growing payout ratio than growing earnings.
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Energen Corp. (NYSE:EGN)

Energen Corporation is a growing oil and gas exploration and production company complemented by a small, single-state natural gas utility.”

From the price and earnings correlated F.A.S.T. Graphs below on Energen Corporation we find that prior to the great recession, this company had compiled an impressive string of consistent earnings growth. Notwithstanding the great recession, the company's average earnings growth rate exceeding 14% is exceptional.
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Since the company started out undervalued in 1997, it is no surprise that its achieved capital appreciation of over 15% is greater than its earnings growth of over 14%. However, the relationship between earnings growth and capital appreciation is closely aligned. Strong operating results produced strong total cash dividends paid in addition to high capital appreciation.
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Sigma Aldrich Corp. (NASDAQ:SIAL)

Sigma-Aldrich Corp. is a leading Life Science and High Technology company. Our chemical and biochemical products and kits are used in scientific research, including genomic and proteomic research, biotechnology, pharmaceutical development, the diagnosis of disease and as key components in pharmaceutical, diagnostic and other high technology manufacturing.”

The price and earnings correlated F.A.S.T. Graphs™ on Sigma Aldrich Corp. depicts a company with strong and consistent historical earnings growth. Notice that the market has generally rewarded this growth with a premium PE ratio, and how stock price has otherwise tracked earnings.
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The calculated performance results for Sigma-Aldrich Corp. relate to and correlate very closely to the company's excellent operating history. Although dividend growth has been strong, capital appreciation for this extremely high quality company has significantly outperformed the averages.
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Filtration, It's What We Do - CLARCOR Inc. is the most diverse filter company in the world. Our filters clean the air you breathe and the water you drink. We clean the liquids used in engines, from trucks to airplanes to locomotives. We filter the air and fluids used in manufacturing plants to decrease pollution, remove odors, reduce energy requirements and improve efficiency. We remove the water and contaminants from natural gas and oil to help meet the world's energy needs.

The earnings and price correlated F.A.S.T. Graphs™ on CLARCOR Inc. illustrates an impeccable record of earnings growth that was only modestly interrupted during the great recession. However, earnings growth appears to have recovered back to their excellent trend line.
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From the calculated performance results we find that CLARCOR's excellent operating record (earnings growth) generated above-average total cash dividends and strong capital appreciation. Therefore, shareholders were rewarded as a result of the company's excellent operating history.
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Nordson Corp. (NASDAQ:NDSN)

Precision Dispensing, Surface Preparation, Test and Inspection, Nordson is the leader in precision dispensing equipment for applying industrial liquid and powder coatings, adhesives, and sealants to numerous consumer and industrial products during manufacturing operations. Nordson solutions also include test and inspection equipment and curing and surface preparation systems. We operate in 30+ countries around the world.

Nordson Corp. produced a reasonably strong earnings growth rate of just under double digits with modest bouts of cyclicality in between. Note how stock prices followed and correlated to their earnings results.
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The most interesting fact regarding Nordson Corp.'s calculated performance result is its variation in payout ratio. From the performance table below it seems that dividend growth was accomplished by wide variations in payout ratio when earnings were weak.
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Franklin Resources Inc. (NYSE:BEN)

Franklin Resources Inc. is the parent of Franklin Templeton Investments, a global investment manager. At the core of our business are multiple world-class investment management groups – Franklin, Templeton and Mutual Series – each operating independently and offering their distinct perspectives to financial advisors and their clients.”

The earnings and price correlated F.A.S.T. Graphs on Franklin Resources Inc. displays a very strong correlation between earnings and stock price. When earnings were flat for many years, stock prices were flat. On the other hand, when earnings were rising strongly, so were stock prices, and when earnings fail precipitously, so did stock prices.
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Once again we find that calculated performance results for Franklin Resources closely correlate to its operating results. Note that in calendar years 2005 and 2007 the company paid special cash dividends of $2 per share and $3 per share, respectively. The forecast dividend for 2011 is an extrapolated calculation and should not be relied upon (the computer cannot think, only calculate). Also note that estimated dividends (marked with a capital E) are not included in the total cash dividends paid columns as they have not yet been distributed.
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CR Bard Inc. (NYSE:BCR)

100+ Years of Medical Technology Innovation - For more than 100 years, C. R. Bard, Inc. has been developing innovative medical devices that meet the needs of healthcare professionals and patients. From a one man shop in 1907 to a global leader in the medical device industry we are committed to enhancing the lives of people around the world.

The following earnings and price correlated F.A.S.T. Graphs™ on CR Bard, Inc. illustrates another example of a high quality company with an impeccable string of consistent earnings growth. Stock prices generally tracked earnings growth, with the period 2004 through 2008 showing the market richly valuing the stock. Even though earnings held up during the great recession, stock price fell with the rest of the market in 2009 due to investor pessimism.
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The calculated performance results for CR Bard once again correlate very closely to its operating history. Strong earnings growth and decent beginning valuation generated above-average capital appreciation and above-average total cash dividends distributed.
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Helmerich & Payne (NYSE:HP)

Helmerich & Payne, Inc. is an energy-oriented company engaged in contract drilling, primarily in the U.S. and South America. The company was incorporated under the laws of the State of Delaware on February 3, 1940.

The price and earnings correlated F.A.S.T. Graphs™ on Helmerich & Payne illustrate a company with a very cyclical record of earnings growth. Nevertheless, the company's average earnings growth rate that exceeded 14% is among the highest in this group. The important question that the investor must ask when considering investing in this company, is how confidently can they rely on future growth? We're not saying that it's not there, but merely pointing out the potential future cyclicality.
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The calculated performance results for Helmerich & Payne (HP) are reasonably consistent with its historical earnings record. Of special note are the wide variances in its dividend payout ratio that coincides with periods when earnings were falling. Continuing to keep its string of dividend increases alive, this company was not afraid to pay out significant portions of its earnings to shareholders.
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Wesco Financial Corp. (NYSEMKT:WSC-OLD)

Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (“Wes-FIC”), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (“Kansas Bankers”), owned by Wes-FIC and specializing in insurance products tailored to Midwestern community banks, (3) CORT Business Services Corporation (“CORT”), headquartered in Fairfax, Virginia, and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (“Precision Steel”), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses.”

The price and earnings correlated F.A.S.T. Graphs™ on our final example, Wesco Financial Corp. is very interesting. This is Charlie Munger's company, the esteemed partner of Warren Buffett. With a dividend yield of only 4/10 of one percent this is the lowest yielding of all the 98 dividend champions. What is interesting about this F.A.S.T. Graphs™ is the fact that the dividend is so low that the light blue shaded area that normally depicts dividends is not even visible on the graph.
Also, the big spike in earnings seen in calendar year 2000 distorts this F.A.S.T. Graphs™. Notice how the vertical scale on the left goes from 0 to 1000 and then from 1000 to 5000. If we were able to remove this one year, this graph would not look as flat as it does.
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From the calculated performance results below it seems somewhat uncharacteristic to even include this company in a discussion about dividend champions. Nevertheless, it is a member of this esteemed group even though it is the lowest yielding of the lot.
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Summary and Conclusions
In evaluating the 10 lowest yielding dividend champions, we discovered that the majority are consistent and faster growing companies than we found with the highest yielding group. But we also discovered that companies with faster earnings growth and lower dividend yields generally produced higher total returns than the lower yielding companies with slower earnings growth. Yet even among this group, there were exceptions to these tendencies.
There are some important takeaways that we feel should be highlighted by this analysis. The argument about whether dividend paying stocks are better than non dividend paying stocks seems misconceived. As discussed in the introduction to this article, the relevance and importance of dividends cannot be denied. Regardless of what studies may claim, dividend paying stocks do not generate the highest rates of return. On the other hand, the returns they do generate tend to come with much lower levels of risk.
Perhaps the most important point regarding all of this applies to investor objectives. For people looking toward retirement or for any person desirous of supplementing their income, dividend paying stocks may be just the ticket. Especially attractive are dividend paying stocks that have increased their dividends year after year. On the other hand, investors with a long time horizon who are interested in accumulating or building wealth should focus more on faster earnings growth. So whether or not you should invest in dividend paying stocks has a lot to do with your long-term investment objectives and your tolerances for risk.
And as it is with most things in life, there's also a middle ground. There are companies that are still growing at above-average rates, but also offer attractive dividend yields. We will refer to these as the “sweet spot” of dividend champions. Our next article will look at 10 dividend champion companies with above-average earnings growth coupled with above-average current dividend yields.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.