|TheStreet.com, Winter, 2013. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
NEW YORK (TheStreet) — This short article will tell you eight dividend-paying stocks every serious dividend investor must consider. As a matter of principle, note that I believe the word “dividend” in the prior sentence is redundant.
The methodology that gets me to the Eight Untouchables rests with an analysis of the dividend payout ratio, which has the twin characteristics of being one of the simplest and most useful ratios in fundamental equity analysis.
Simply put, the dividend payout ratio is: Dividends Per Share ÷ Earnings Per Share. For you purists out there the DPR is: Cash Common Dividends/(Income Before Extraordinary Items-Minority Interest – Cash Preferred Dividend) x 100.
The DPR is useful because it tells investors what percentage of profits are allocated to shareholders in the form of dividends, and conversely what percentage is ploughed back into the business. From this, all sorts of useful inferences can be made. Equally useful is the DPR over time, because it tells investors whether or not the company is sporting an unsustainable dividend or whether it is the company hording cash.
Before delving into the Untouchable dividend payers, one other interesting side note. For perspective, it’s useful to look at the dividend payout ratio of the S&P 500 Index, as a whole, over the last 10 years.
I think this demonstrates two important points. First, note 2008, where the dividend payout ratio climbed to 107%, indicating when the bubble burst, just how much earnings fell, and just how much danger there was to future dividends.
Second, note that over time — for these 10 years at least — the DPR was fairly level, growing at just 0.91%. To me this suggests that as an overall benchmark, DRP’s below 50% might considered on the and low side, and those above 50%, might be considered on the high side, as a first brush before any other fundamental factors are considered on any specific equity.
Now then, the Untouchables, in my mind, would be those stocks that have been able to consistently increase the dividend payment to shareholders over time, while decreasing the dividend payout ratio over time. Given the slow- to no-growth economy over the last several years, this isn’t easy, and reserved for only the most talented of management teams.
In all there’s 18 companies that have been able to do this over the long haul. Actually, there’s more, but there’s only 18 that have been able to reduce their DPR at a 5% compound annual growth rate. Here they are in all their glory.
Remember, though, decreasing the payout ratio is only one half of the trick. Untouchables must increase their cash dividend, by a lot. By “a lot,” I mean at a double-digit compound annual growth rate. Double digits might be a tad harsh on my part, since a 7% compound annual growth rate will double a long-term investor’s yield in 10 years (less if they reinvest). Applying this “harsh” criteria, yields (no pun intended) the following list of Untouchables.
For the GMG Defensive Beta Fund(MPDAX), of which I am the co-portfolio manager, we own Monsanto (MON), Deere (DE), Caterpillar (CAT), Disney (DIS) and Exxon (XOM).
A note of caution to would-be Untouchable finders out there. Across a variety of financial databases we subscribe to, we found complete 10-year dividend data on just 133 of the 500 companies that comprise the S&P 500.
Companies with incomplete data were left out of my analysis. Many of them, probably, should have been because they missed making dividend payments. But incomplete data could also stem from mergers, acquisitions, divestitures and the like. This means looking carefully and piecing together data might lead to a larger list of Untouchable Dividend Payers.