Dividend stock investors are quick to tout the power of income investing as way to produce consistent, low-risk returns.
However, the best dividend stocks are not just companies that shell out a mammoth payday and subsequently struggle to stay relevant. (After all, one way to see a dividend yield double is to watch the share price get cut in half.)
So rather than simply chase high-yield dividend stocks, investors should instead focus on sustainable businesses that consistently deliver a great deal of capital back to shareholders — and as profits grow, those payouts grow as well.
Nobody likes to see a mammoth corporation stockpiling cash instead of letting shareholders share in the largesse. So consider these seven dividend stocks as case studies in companies that are being very generous with their profits:
Caterpillar (CAT) has had a rough go of things lately. The global commodity crash has gutted its mining equipment sales, and the slowdown in government spending has weighed on orders for the big machines used in infrastructure projects.
But long-term investors know that while CAT is a cyclical stock that rises and falls based on these broader economic activities, it also is a stable and reliable dividend payer. Caterpillar yields almost 2.9% at current pricing, paying out 60 cents a quarter for almost $1.6 billion in total dividends paid annually.
On top of that, Caterpillar just announced an accelerated stock buyback plan in July that would snap up $1 billion in shares across the third quarter in addition to the previous $1 billion buyback announced in June. As CEO Dog Oberhelman said in July, “Repurchasing stock in a downturn is a key part of our cash deployment strategy.”
That should tell you everything you need to know about how important buybacks are to CAT — especially when it sees its shares as undervalued.
While Apple (AAPL) was maligned by investors for years as it sat on a massive war chest, the tables have decidedly turned and now this tech giant is becoming quite generous with its cash hoard.
Consider that company now pays $3.05 per share every quarter, good for a 2.3% dividend yield at current valuations. That adds up to nearly $11 billion in dividends paid annually to shareholders.
Of course, that’s still only about a quarter of fiscal 2014 earnings, so there’s more upside to come. And given the fact that Apple only recently instituted its dividend in 2012 and that it has already bumped its dividend 15% since then, there’s a very good chance for future dividend growth.
Beyond the dividends, Apple also is in the middle of a $100 billion stock buyback plan that will run through 2015, an increase of $55 billion over its initial stock buyback plan that was started in 2012 as the first dividends were dished out.
Carl Icahn has made a lot of noise about getting Apple to unlock further value for shareholders with another massive buyback scheme … but regardless, it’s undeniable that AAPL has earmarked a boatload of capital for shareholders that will provide great income and reduce Apple’s share count (and subsequently boost earnings) going forward.
Exxon Mobil (XOM) is one of the most entrenched companies on the planet. It has a $400 billion market cap, a AAA credit rating and over $56 billion in annual operating cash flow.
It also is a dividend and buyback stalwart, dishing out a large amount of capital to shareholders every year.
Right now XOM stock yields 2.8%, paying 63 cents a quarter that’s good for about $11 billion in total dividends paid each year. Furthermore, Exxon stock buybacks are massive — with Exxon regularly repurchasing between $3 billion and $6 billion in stock every single quarter dating back to late 2010.
According to Wall Street Journal estimates, XOM has spent more than $200 billion on repurchases in the past 10 years.
If you don’t think this stock is sharing cash with shareholders, you’ll never find a publicly traded company that’s generous enough!
It’s undeniable that pharmaceutical stocks are under pressure amid patent expirations. It’s also clear that drugmakers need to spend big bucks on replacing the product pipeline, either via massive acquisitions of smaller biotech players or by spending billions of dollars every year on their own home-grown ideas.
But despite this, income investors shouldn’t overlook the power Big Pharma still has to deliver huge dividends and big-time buybacks that boost shareholder value.
Merck (MRK) dishes out 43 cents per quarter, good for a 3.7% dividend yield and about $5 billion in total dividends paid each year. And furthermore, MRK announced a $15 billion stock buyback plan this year, with about $7.5 billion of that coming by May 2014.
Sure, the revenue picture has been foggy ever since Merck’s blockbuster asthma drug Singulair went off-patent, and it’s unclear how its pipeline will play out in the years ahead.
But if MRK can deliver this kind of cash at the same time it’s spending more than $8 billion on research, that’s a good sign that this pharmaceutical stock is serious about keeping cash in the hands of shareholders.
Another tech giant that is a big proponent of returning money to shareholders is IBM (IBM). While not quite as rich as the aforementioned Apple, it still is a well-heeled tech player with a lot of cash to share with investors.
IBM has paid dividends in some form since 1916, when it was still known as the Computing Tabulating Recording Company. And while the company has come a long way, its commitment to payouts hasn’t changed; IBM currently pays 95 per share per quarter for about $4.1 billion in total dividend payouts annually.
IBM stock currently yields 2.1%.
Beyond dividends, IBM stock buybacks are another great way that shareholders are seeing cash returned to them. IBM’s board just approved a $15 billion buyback plan, bringing its total repurchase plan to $20.6 billion.
Furthermore, the blue-chip stock known as Big Blue has returned a whopping $159 billion to shareholders since 2000.
With a low dividend payout ratio that is just 21% of FY2014 earnings, IBM has plenty of more room to expand its dividends and buybacks going forward, too.
Industrial glass manufacturer Corning (GLW) makes the heavy-duty screens on tablets and smartphones, and has a strong 21st century business despite rather low-tech roots.
While GLW is having a boffo 2013, up 30% year-to-date, shares still are off roughly 35% from their 2011 peak. However, the dividend potential of this company makes it a powerful long-term bet; GLW pays 10 cents a quarter to yield 2.3% and deliver about $580 million in cash back to shareholders.
And on the stock buyback front, GLW just authorized a $2 billion stock buyback plan in April on the heels of a $1.5 billion plan that should expire nearly fully executed at the end of 2014 after snapping up over 40 million shares during the past 12 months.
Corning is admittedly smaller than the other players on this list, but at a $24 billion market cap, it’s hardly a small fish. Dividend investors can have confidence that this company will continue its big paydays going forward.
Tech giant Microsoft (MSFT) has been in the news for some unfortunate missteps lately, including troubles with its mobile line and the recent departure of long-time CEO Steve Ballmer.
But dividend investors can have confidence in the generosity of MSFT in good times and bad. Although Microsoft has a relatively short history of dividends and buybacks, its track record is quite impressive.
Right now MSFT yields almost 3%, paying out 28 cents a quarter for about $9.35 billion in annual dividends.
Microsoft also is a stock buyback leader, authorizing $40 billion this year to replace a previous $40 billion authorization. Across the last decade, Microsoft has repurchased about $110 billion in MSFT stock.
There’s no guarantee that stock buybacks alone can prop up the company if it continues to struggle evolving in a post-PC age … but if you’re in MSFT because of the income potential, have confidence in the generosity of Microsoft.