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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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The Best Gift an Investor Can Get: Dividends |
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As the head of the Vanguard Windsor Fund, John Neff beat the S&P 500 by better than 3% per year for 24 years. At least 2% of that amount is attributed to his preference for stocks that paid a generous dividend. Dividends are cash payments that companies make to stockholders, typically on a quarterly or annual basis. While not all dividends are equal - an example is the dividend paid by General Motors (GM) last year, which was eventually cut to save cash for restructuring - determining dividend security is not an exceptionally difficult task. Considering the immense competition and turnaround GM was facing, it was foolish for the company to continually pay out more than $1 billion per year in dividends to stockholders. Looking at GM’s Statement of Cash Flows, the company paid out twice its FCF as dividends in 2003 and 70.5% of FCF in 2004, which was a sign of an impending cash crunch and dividend cut before a disastrous FY2005 where GM burned through $25 billion in FCF. Compare General Motors’ situation to a company like Coca-Cola (KO), which has increased its dividend annually for 45 consecutive years and has one of the strongest, if not the strongest, brand in the world. Coca-Cola has an enormous economic moat; long time Coke shareholder Warren Buffett once said that if he was given $100 billion and told to unseat Coca-Cola as the dominant soft drink manufacturer in the world, he would return the money rather than attempt such an impossible task. Year in and year out, Coca-Cola has generated billions in FCF, and rewards shareholders with a 3.0% dividend. Yes, GM currently pays a larger dividend - 3.4% - but which dividend is better? I would say without hesitation its Coca-Cola’s. One interesting coincidence about dividend-paying companies is that they are normally better than non-dividend payers. Is it really a coincidence? I don’t think so. Management’s decision to pay a dividend shows confidence in the company’s ability to continually generate cash. Raising a dividend indicates even more of the same confidence, and consistent dividend payers have been shown to crush the overall market. Some examples of companies that have raised dividends for 25 consecutive years include Consolidated Edison (ED), Johnson & Johnson (JNJ Stock Brief), McDonald’s (MCD), Altria (MO), Proctor & Gamble (PG), and Wrigley (WWY). You can also buy into a broad index of stocks like this with ETFs like DVY or SDY. One important thing to remember with dividends is that the yield moves inversely to the share price. As the share price declines, the yield increases. Buying a stock at this suddenly lower price allows the investor to lock in the current yield, as well as gain the capital appreciation potential. For this reason, I like to look for solid dividend paying stocks that have recently been sold off, such as JNJ and recent stock report feature ARLP, which currently yields more than 6%. In short, dividend-paying stocks can benefit all investors, not just the older crowd that is often stereotyped as “income investors”. Going forward, I’ll likely highlight more dividend payers here from time to time, but until then, you can start your search with some lesser-known dividend names, or check Seeking Alpha for articles on dividend stocks. |