The #1 dividend payer as a percentage of the share price (over the trailing 12-months, or TTM, to Sept. 30, 2013) is an apparel company called L Brands (LTD)*, which in the past year yielded 7.1%. This is the old Limited Brands, which changed its name and decided to issue a series of special dividends to turbocharge its share price, as it had the earnings power to do it. It issued special dividends of $1 and $3 in March and December of 2010, in addition to its regular dividends, then added special dividends of $1.00 and $2.00 in June and December of 2011, and special dividends of $1.25 and $3 .00 in August and December of 2012.
It has not issued any special dividends in 2013, but it sure made up for that with the $4.25 total in 2012. The special dividends skew the payout ratio, which stands at an absurd 187%, but there is $872 million (and growing) in levered free cash flow for more dividends, so I would not think that L Brands is done on the special dividend front. It seems they stretched themselves in late 2012 to get the expiring lower tax treatment for dividends and may again surprise investors in 2014.
LyondellBasell Industries (LYB)* — the second- highest yielding company in the S&P 500 on a TTM basis — is a different story. LYB also issued special dividends in 2011 and 2012 of $4.75 and $3.15, respectively, with no special (but higher regular) dividends in 2013.
Still, this is a major chemical company whose U.S. operations filed for bankruptcy in 2009. I’m not calling for a recession, but chemical companies are notoriously cyclical, and they sometimes go bankrupt if they carry too much leverage in downturns. This is a perfect business for special dividends, when there is money to give them, but it is also a business that should not carry high debt levels, given the cyclicality of the chemical business.
The third highest S&P 500 yielder is also a little surprising, as it is an oil-service company, Diamond Offshore Drilling (DO). Typically, oil-service companies have volatile dividends, but DO is in the deep-water drilling business, which has much longer-term contracts for its projects. It can survive oil price storms with much less sensitivity to its P&L statement than a land driller can. Since 2006, DO has delivered $35.88 in regular and special dividends, which is impressive given its $61 share price.
As you can see, dividends are much more arbitrary than coupon interest, but both dividends and bond coupons have a place in an income investor’s portfolio, as they tend to complement each other.
*Navellier may hold this security in one or more investment strategies offered to its clients.
Written by Ivan Martchev