by Marc Bastow | September 11, 2012 1:05 pm
For investors trying to plot a long-term strategy, it’s critical to understand the power and significance of dividends, and to spot those companies that provide a virtually unending stream of payouts.
Markets go up and go down, but finding those long-term dividend payers that can get you through the tough times with steady income and just as important, the promise of continued increases to that steady income, is reassuring and, well, profitable!
But don’t go around getting confused between companies that steadily raise dividends but might be in difficult businesses that might squeeze your income down the road. As an example, let’s take Walgreen (NYSE:WAG), a tried-and-true dividend payer that has made it onto InvestorPlace‘s list of Dependable Dividend Stocks.
In June, the venerable pharmacy company raised is annual dividend by 22.20% to $1.10 per share, and its 10-year dividend growth rate has been 18.90% per year. Furthermore, Walgreen has raised its distribution for 37 consecutive years.
All well and good, but this is a company and, indeed an industry, in flux and disarray. Walgreen’s troubles with Express Scripts (NASDAQ:ESRX) pushed customers out the door at a time when CVS (NYSE:CVS) is working hard to expand, and Target (NYSE:TGT) is deep into the industry. Is Walgreen in imminent danger of dropping cutting its dividend? Not hardly, and it’s unlikely to stop the increases either. But long term, say five to 10 years, you may see a dramatic slowdown in the numbers.
The point is that you need to be vigilant, focusing on a company’s fundamentals like solid cash balances, steadily increasing free cash flow, low dividend payout ratios and all the “moats and whistles” portfolio managers like Warren Buffett and George Soros live to find.
Want some examples? Gladly! Here are five rock-solid dividend stocks with exceptional histories of dividend increases and more to come. Consider owing these stocks with buying on dips and valleys to get the benefit of income averaging.
Does it get any more basic than Exxon (NYSE:XOM), the largest oil company in the U.S. and also one the most profitable in the world? XOM has paid a dividend since 1882 and has hiked its payout for 30 years in a row. XOM’s current dividend is $2.28 per share annually with a yield of 2.54%.
You want cash? How about $18 billion on hand and free cash flow of $1.8 billion as of June 30? With a 21% payout, investors can look forward to years of increased dividends. In fact, perhaps we should be pressing management for higher increases!
Sure Wal-Mart (NYSE:WMT) is under pressure on all fronts: Target (NYSE:TGT) is gaining with perhaps better marketing, and small, local discount retailers like Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) are taking bites out of Wal-Mart’s revenues, but it’s still the industry’s 800-pound gorilla. It has paid out dividends since 1973, and has increased them for 38 consecutive years. WMT’s current dividend is $1.20 per share annually for a 2.16% yield.
Cash on hand stands at $8 billion with just over $3 billion in free cash flow. WMT’s 32% dividend payout ratio still leaves it with lots of room to run for the long-term investor.
Who doesn’t love the Golden Arches of McDonald’s (NYSE:MCD)? More important, who doesn’t recognize those Golden Arches? From New York to California to Bejiing and now to New Delhi, everyone knows them, and the wise folks at MCD make every effort to cater to new customers the world around.
Competition? I don’t know — does Wendy’s (NASDAQ:WEN) count? McDonald’s has paid a dividend since 1976, with 35 consecutive years of increases. Today’s dividend of $2.80 cents per share annually provides a juicy 3% yield.
With nearly $2.5 billion in cash and nearly $1 billion in free cash flow, things are still cooking at McDonald’s. Its payout ratio is just over 50%, and that might scare off some investors, but not this one. MCD will be around flipping burgers and whatever appeals to the GLOBAL mass consumer for a very long time, and rewarding investors is just a part of the recipe.
It’s easy enough to say what’s good enough for Warren Buffett is good enough for me. But Coca-Cola (NYSE:KO) is the poster child for Buffett’s long-term strategy and success, so why go against the guru? Coca-Cola does of course have competition, most notably from PepsiCo (NYSE:PEP). But with Coke’s incredibly rich history, investors can expect this story to continue: Dividends paid since 1883, and increases three pages long on the historical chart.
A recent 2-1 stock split has put the shares in a very nice price range for new investors, and with a $1 per share annual dividend and 2.70% yield, it’s a good time to be in the stock.
Coca-Cola sits on $17 billion in cash and another $3 billion in free cash flow to support a 52% dividend payout ratio, which is low enough for me to believe the increase won’t go away anytime soon. I suspect if Coca-Cola had any inkling that might change, Mr. Buffett would hear about it, and so would you. Not to worry!
OK, time to go out on a little limb here since I just wondered aloud about the Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) “WinTel” dynasty showing signs of age and maybe in a bit of competitive trouble. But since paying its first dividend in 2003, MSFT has increased it on a very consistent basis. Today it stands at a modest 80 cents per share annually, for a yield of 2.6%. Not bad for starters, and in fact rumor on the blogs and elsewhere is that another increase may be in the works for this week.
You see, here’s the kicker for MSFT dividend investors: $63 billion in cash, and around $7 billion in free cash flow. Wow, that’s a load of money that could carry MSFT — and investors looking for increased dividends — for a very long time. In fact, with Microsoft’s dividend payout at 38% investors should be asking for a major raise, just like in the case of XOM. So keep your fingers crossed.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he’s long MSFT, INTC, and XOM.
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