I firmly believe that today’s best investment for tomorrow is a focus on that old stalwart of long-term investing: dividend stocks.
Don Schreiber over at Financial Advisor appears to agree, and gave some key data points that show not only the benefits of dividend investing, but just how good we as income investors have had it over the past few years:
- From 1947 to 2011, the inflation rate as measured by the Consumer Price Index (CPI) was 3.95%. The average dividend increase in the Dow Jones Industrial Average of 6.29% over the same period more than offset the level of inflation.
- Dow Jones Industrial Average, S&P 500 Index and Nasdaq companies have increased dividends annually by an average of 7.07%, 5.46% and 45.38%, respectively, in the past decade.
And here are a couple other points I’ve scrounged up that should really warm your cash-loving hearts:
- Nearly $1 trillion in cash and equivalents sits on the books of S&P 500 companies today.
- The S&P dividend payout ratio today stands at around 30% of earnings — well below the 48% found in the 1990s and the historical 54% rate.
So what do all those figures mean for you and me?
Again, that dividend investing is in our best interests, and that the kitty should only get prettier as the years go buy.
Tactically, however, while we obviously should make sure we’re entrenched in already high-yielding names, we also should consider some less flashy dividend payers that have the potential — thanks to piles of cash, steady cash flow and low payout ratios — to sweeten the pot down the road. Not to mention the possible impetus for doing so.
With that in mind, here are three dividend stocks I believe will pay off in the long term as you usher in this “golden age” of dividend investing:
Dividend Yield: 1.2%
Disney (NYSE:DIS) has been hitting on all cylinders for years now. And that’s a lot of cylinders. We’re talking theme parks, cruise liners, the ABC family of networks (which includes ESPN), movie and TV content — think Pixar, Marvel and LucasFilms — and of course the licensing rights to its huge stable of characters.
All of that has helped fill the vault — in the past four years, Disney’s cash and short-term equivalent balances at year-end have never dropped below $5.4 billion (2010), and its free cash flow never dropped below $5 billion (2009). Needless to say, DIS has plenty in the coffers to throw at shareholders.
Last November, I highlighted a nice 25% hike in Disney’s annual dividend. That latest payout stood at 75 cents, representing a 114% dividend boost in just five years! And DIS isn’t even making a dent with that payout, only shelling out 20% of its earnings in dividends.
While it’s not a discount, and probably won’t be for some time at this rate, InvestorPlace’s Lawrence Meyers loves it for his retirement IRA, and so do I.
Dividend Yield: 0.7%
Oracle (NASDAQ:ORCL), which is a more recent entry into dividend-paying status, also can be a long-term player in the Golden Age of Dividends.
Oracle finally joined technology compatriots like Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) in making regular payouts back in October 2009. It has quickly added to its initial 5-cent payout, currently doling out 18 cents per share.
The developer and manufacturer of enterprise software hardware and storage products is coming off a bit of a quarterly stumble, having missed analysts’ top and bottom line numbers in its fiscal third quarter, with revenues of $9 billion and earnings of $2.5 billion both in the ballpark of the year-ago figures. (And both would’ve been marginally higher had it not been for a strengthening U.S. dollar.)
Oracle is attacking its revenue problems through a continued emphasis on organic growth; the company just started delivering its SPARC T5 microprocessor mid-range server line for cloud processing applications, and also will roll out its new M5 — its largest and fastest server. The goal? An all-in-one stop for cloud computing, run solely on Oracle computing power.
CEO Larry Ellison isn’t afraid to look outside the company to shore up weak spots. Oracle has pulled the trigger on more than 80 deals in the last 10 years, including scooping up Sun Microsystems in 2010, and more recently, Nimbula, a startup that provides private cloud infrastructure management software.
Make no mistake: The cloud business is getting crowded. Indeed, analysts see little more than single-digit growth for the next few years at Oracle. But historical gross margins run at nearly 80%, with operating margins of nearly 37% and net profit around 25%. It’s going to be continued hard sledding in the future, but these kinds of margins mean time is on Oracle’s side.
So is money. Oracle’s cash stash sits at $33 billion off that same disappointing quarter; add another $8 billion in free cash flow and a scant 16% payout ratio, and you’re looking at a company with all the room in the world for bigger dividends.
One thing to note, though. Last quarter, ORCL paid out just more than $1.4 billion in dividends — an outlay based on an accumulated three-quarter payout made in advance of what was a potential tax hike on dividends. That means investors won’t receive another quarterly payout until Q4, and the next opportunity for Oracle’s board to consider another hike will be its earnings announcement for FY2014′s Q1, which ends on Aug. 31, 2013.
The stock has been in a bit of a rut, trading in the low to mid-$30s since 2011. All the more reason to think Oracle investors will be poised for another dividend increase as soon as the opportunity arises.
Dividend Yield: 2.1%
Insurance might be as dull as it gets, but we don’t want a thrill out of Travelers (NYSE:TRV) — we want more cash.
You might know Travelers by its adorable ads, but the Red Umbrella is best known for its status as one of the country’s top writers of personal and commercial insurance. It’s on steady footing, with its most recent earnings report showing improvements on both the top and bottom lines. This from a company that has provided beats on both profits and revenues in four of the past five quarters.
TRV has been extremely active on the shareholder value front, repurchasing 22.4 million shares for $1.45 billion in 2012 while yielding a modest 2.1% in dividends.
Why I like Travelers as a payout grower going forward: The company sits on nearly $4 billion in cash, with another $3.2 billion in free cash flow. Meanwhile, it sends out just $650 million quarterly, which represents a payout ratio of only 28%. Travelers’ five-year dividend growth is running at a 10% annual clip, which it can easily continue to match (if not improve upon).
TRV has been setting new all-time highs for more than a year now, and its forward price-to-earnings ratio of 11 is relatively high for the stock, historically speaking, so investors might be best served waiting for some sort of dip before buying. Regardless, the stock should be a core holding for long-term investors — and increasingly loved as bigger quarterly checks pile up.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT.