While no one was paying attention, dividend stocks hit a major milestone earlier this month.
For most of this year, investors have been transfixed on stock prices — and whether the venerable S&P 500 can possible surpass its 2007 all-time highs at 1565. But while scores of investors have been watching the S&P, they've missed the record-setting performance that dividends have contributed to the mix.
Stocks have never paid out more money in dividends than they’re paying right now. Those record payouts have helped the S&P 500 Total Return Index (a version of the more familiar S&P index with dividends factored in) push through its record highs at the start of April, a milestone that investors should be paying attention to; clearly, it pays to be a dividend investor.
And with record $1 trillion in cash held among S&P 500 constituents, there’s plenty of dry powder on corporate balance sheets to fuel even bigger dividend payouts in the future. Over the long term, though, the benefits of chasing dividends are even more dramatic.
Over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5 percent annually, and they outperformed nonpayers by nearly 8 percent every year, all while paying out cash to their shareholders, according to data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts.
That’s why we pay close attention to the firms that are shoveling more corporate cash to shareholders. With that, here's a look at six stocks that hiked payouts in the last couple of weeks.
The biggest name to hike dividends in recent memory is Hewlett-Packard, the $50 billion computer maker. The firm announced a 10 percent dividend increase on March 22, pushing its payout to 13.2 cents each quarter and driving its dividend yield to 2.1 percent.
HP is having a pretty good week: Shares climbed more than 7 percent following news that the firm had grown its share of the PC market. That good news should help investors forget about the company’s problems — at least for now.
These days, the PC business is a commodity business with few barriers to entry and where cost is king. That’s somewhat advantageous for HP; because of its scale, the firm can drive costs lower than less mammoth peers. That said, management realizes that PCs aren’t an attractive business, and CEO Meg Whitman and company realize that enterprise IT is a much more attractive driver of returns in the mid-term to long-term.
This month, HP made the decision to combine its PC business with its printer business, a move that should help reduce the costs involved with both. While printers have fallen to the wayside in the last couple of years, the business does generate very attractive recurring revenues through ink sales — it too should benefit from revamped operations.
HP’s yield is decent, but it doesn’t make sense as a core income holding in 2012.
5. Dow Chemical
Meanwhile, Dow Chemical is having a strong year in 2012. Since the first trading day of the year, shares of the $39 billion firm have rallied 13.6 percent, besting the broad market by a fair margin. Dow is one of the largest chemical manufacturers in the world, with a hand in nearly every industry you can imagine. That diversified revenue base should attenuate some of the economic fears that are keeping investors on the sidelines of this stock.
Dow has spent the last several years positioning itself for long-term growth, building new production facilities in emerging markets and buying up subsidiaries with exposure to attractive sectors. While rising oil prices are a challenge for Dow, adding facilities in regions where oil and gas are lower cost should have a major impact on the firm’s margins, especially if oil prices continue to climb through this summer.
Chemical manufacturing is a capital-intense business, and Dow carries a reasonable amount of debt as a result — particularly after the firm’s $17.3 billion Rohm and Haas acquisition in 2009. Still, ample cash generation from operations should help Dow deleverage its balance sheet and pay out a hefty dividend.
Yesterday, the firm announced a 28 percent dividend increase that brings the firm’s dividend yield to 3.9 percent. For investors looking for broad industrial exposure, Dow’s a solid option for a core income holding.
4. PNC Financial Services
Pittsburgh-based PNC Financial Services is one of the biggest banks in the country, with $264 billion in assets and more than 2,500 branches spread throughout the Midwestern, Mid-Atlantic, and Southeastern U.S. PNC’s size is thanks in large part to the financial crisis of 2008, when the firm was able to acquire National City at fire sale prices and instantly double its deposit base.
A conservative balance sheet is a major factor in PNC’s successes in the past few years; by avoiding excessive risks, the firm was able to grow during the recession, pay off TARP early, and even hike its dividend payouts for investors. Net margins are impressive — at more than 20 percent in fiscal 2011 — and should remain high as long as PNC keeps its focus on traditional retail and commercial banking and just works at increasing its deposit scale.
Back to those dividends.
Last week, PNC management announced a 14.29 percent dividend increase, a move that brings its quarterly payout to 40 cents per share. The increase brings PNC’s dividend yield to 2.52 percent. As far as banks go, you could do a lot worse than PNC. That said, I still think that there are a handful of regional banking names that look a little more attractive to income investors.
Diversified industrial firm Idexis another name that hiked its dividend payouts this week. On Tuesday, the firm announced a 17.65 percent dividend increase that brings its yield to just shy of 2 percent.
Idex has its hands in everything from fluid pumps and metering devices, to health and science products, to fire and safety offerings. That business diversification is attractive for an industrial stock, but it doesn’t really spare Idex from cyclical swings; fluid pumps and meters make up close to half of sales, so any hiccups in that market can still have dramatic effects on the firm's financial performance.
That said, some economic tailwinds in the water industry should keep demand reasonably strong for IEX’s pump and meter offerings in 2012.
Financially, IEX is in good shape with ample balance sheet liquidity and a moderate debt load. That positioning should help keep those dividends flowing for the foreseeable future. The yield is a little on the low side for income investors, but this industrial has enough attractive attributes to give it a supporting role for income portfolios.
2. Tanger Factory Outlet Centers
Tanger Factory Outlet Centers is a real estate investment trust (REIT) that owns 37 outlet centers in 25 states, comprising more than 11.4 million square feet of leasable space. Tanger benefits from creating a destination in its outlet malls — shoppers are typically willing to spend whole days at the outlets, a factor that gives the company a traffic advantage over more fragmented retail REITs. All told, more than 175 million shoppers visit Tanger properties each year.
Generally, investors think of REITs as a way to gain exposure to real estate, but that’s not exactly the case. Instead, these trusts are really income-generation vehicles — they typically sign long-term triple-net leases that separate ownership of retail properties from the risks associated with insurance, property tax, and maintenance costs. And because REITs are legally obligated to pay out the vast majority of their incomes as dividends, they’re purpose-built to deliver income to investors.
Last Thursday, Tanger announced a 5 percent increase in its dividend payout, bringing the REIT’s quarterly payout to 21 cents per share. That’s a 2.84 percent dividend yield at current price levels. I do think that there are some more attractive niche REITs out there right now, but there’s something to be said for Tanger's ability to draw shoppers as a destination in good times and bad.
1. International Speedway
Last up on this week’s list is International Speedway, a small-cap entertainment stock that operates major racetracks around the country. ISCA’s properties include some of the biggest and most well-known tracks in the country, including Daytona International Speedway (home of the Daytona 500) and Talladega in Alabama.
ISCA is inseparable from NASCAR — the firm hosts some of the biggest events in the circuit, and is majority owned by the France family, which also owns NASCAR. That massive exposure to a wildly popular sport (second only to the National Football League in TV viewership) gives ISCA a major economic moat with little risk from new competitors.
The convalescing economy has had a palpable impact on ticket sales to NASCAR events hosted at ISCA tracks in the last few years. While that's pressured revenues, those pressures should abate once fans become more willing to spend money on sporting events.
ISCA announced an 11.1 percent dividend increase last week, bringing its annual payout to 20 cents per share. This stock isn’t a core income holding by any stretch of the imagination (it yields less than 1 percent right now), but management is certainly sending a message to investors by paying out more cash in 2012.
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