Monday Morning: Here’s a blast from the past – dividends
Another look at stock dividends.
General Motors Corp. tried to change the image of its stodgy sedans with the slogan: “This is not your father’s Oldsmobile.”
During the tech stock boom and all of the frenzy over the so-called New Economy, the same could be said about the stock market.
But as much as things change, they also seem to stay the same, and this may well be your father’s stock market after all.
Many experts are predicting only modest gains in the market – ranging from 5% to 8% per year – for the foreseeable future, mirroring average gains from the 1950s.
If that’s the case, it may be time to reconsider a throwback to the days of tail fins, bobby socks and drive-in movies – stock dividends.
Back in the day, dividend-yielding stocks were a staple in most portfolios. The idea of buying stocks for their dividends, however, eventually went the way of the Studebaker.
But Carol M. Lippman, a vice president, senior analyst and portfolio strategist at A.G. Edwards & Sons Inc. in St. Louis, is still a believer.
“It was a wonderful strategy for a long time,” she says. “Then deregulation entered the picture.”
During the go-go 1980s and the booming 1990s, the emphasis shifted to market appreciation and growth stocks. Fewer and fewer companies even paid dividends.
In 1990, Ms. Lippman set up a screen to find out how many companies had raised their dividend annually in nine out of the previous 10 years. Some 1,441 emerged.
She’s continued to run that screen every year since. For the 10-year period ended in 2000, the number of companies had dwindled to 455. But now that the market’s crashed, Ms. Lippman believes, investors should be looking for dividend-paying stocks.
Here’s why: Poring over historic data back to 1934, she discovered that stocks of companies that raised their dividend regularly didn’t fall as far as non-dividend stocks in bad markets. And in stable markets, dividends are like icing on the cake.
To identify the best dividend payers, Ms. Lippman split the market into 10 sectors and came up with 101 stocks. The minimum yield to get on the list is 1%, and some stocks have done well below 1%.
That’s because dividend yield can be misleading, she says. A company’s yield could be rising mainly because the company and its stock price are faltering. So she also looks at such factors as good earnings, strong cash flow and a proven track record for expanding the business over the long haul.
“When a company makes a commitment to pay a dividend, that really says something about its financial wherewithal,” she says. “We’re really in some scary times, and these 100 or so companies are really market leaders able to thrive when others may falter.”
Among one of her favorites is Fortune Brands Inc. (FO), a Linconshire, Ill., consumer products holding company that owns Titleist golf equipment, Jim Beam whiskey, Master Lock, Swingline and other well-known brands.
It pays $1 per share in dividends, which works out to a 2.7% yield at the current stock price of $37.41. Ms. Lippman expects 5% dividend growth and 11% estimated earnings growth next year.
She also points to Arthur J. Gallagher & Co. (AJG), an Itasca, Ill., insurance broker. It has increased dividends for 16 consecutive years. The current yield is 1.47%, with its stock price at $37.57. Ms. Lippman is looking for 10% growth in both earnings and dividends next year.
“If companies can raise their dividend year after year, you can put away their stock and forget about it,” she says.
And you can get some sleep at night, too.
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