I am a firm believer in dividend growth investing strategies, where one could purchase a stock in a company that consistently increases its dividends and watch their dividend income rise over time. Dividend investing is a long-term strategy however, as the full impact of the fruits from your investments won’t be felt for several decades.
Successful dividend investing is much more than picking the highest yielding stocks however. Recent history has shown that in most cases, the stocks with the highest yields are the first to cut distributions when trouble arises. In order to be successful at long-term dividend investing, one needs to find the right balance between dividend growth and dividend yield.
There are several stocks, which offer tempting current high yields, which are less likely to be sustained. Most of the companies mentioned below are members of the elite S&P Dividend Aristocrats index for now.
Avery Dennison Corporation is engaged in the production of pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. The Company's segments are Pressure-sensitive Materials, Retail Information Services and Office and Consumer Products. The company last raised its dividend in 2007. Avery Dennison has been unable to cover its dividend payment over the past two quarters. Based off the past 4 quarterly earnings reports however Avery earned $2.16/share and paid out $1.64 in dividends per each unit of common stock. Avery ended its 32-year streak of consistent dividend increases in 2008.
M&T Bank Corporation (M&T) is a bank holding company. The Bank offers a range of commercial banking, trust and investment services to its customers. M&T Bank last raised its dividend in 2007 as well. M&T Bank paid out most of its earnings as dividends over the past 3 quarters and couldn’t cover its distribution in the latest quarter. The bank is also one of the financial institutions, which had taken funds from the US Treasury. M&T Bank took $600 million in TARP money back in December 2008. M&T Bank ended its 27-year streak of consistent dividend increases in 2008.
Leggett & Platt, Incorporated is a diversified manufacturer that conceives designs and produces a range of engineered components and products used in homes, offices, retail stores and automobiles. Leggett & Platt’s dividend was last raised in 2007, which ended the company’s 37-year streak of dividend increases. The company hasn’t been able to even cover its dividend payments by earnings for both 2007 and 2008 fiscal years.
Johnson Controls provides automotive interiors, products and services that optimize energy usage in buildings and batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise. The Company operates in three businesses: building efficiency, automotive experience and power solutions. The company last raised its dividend in 2007, ending its 33-year streak of consistent dividend raises. Even though Johnson Controls only yields 2.50%, which could hardly be justified as “high yield stock” per se, it has not been able to adequately cover its distributions from its earnings since Q4 2008.
This being said, due to the company’s diversification in location, products and clientele it should be able to withstand the current crisis in the automotive industry. The price of future growth could come at the expense of a dividend cut.
Just because companies have not been able to cover their dividends over the past few quarters doesn’t mean they would necessarily be cut; a rebound in corporate profits could push down payout ratios to more reasonable levels. The lack of dividend increases for more than one year however typically indicates that management does not see an improvement in the company financials over the next two years. Unless dividends are raised by the end of 2009 for the four companies mentioned above, they would certainly be dropped out of the Dividend Aristocrats indexes.
Full Disclosure: None
Relevant Articles:
- Don’t chase High Yielding Stocks Blindly
- High yield stocks for current income
- Why do I like Dividend Aristocrats?
- Dividend Analysis of M&T Bank Corporation (MTB)
- Dividend Stocks to Avoid
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Rather than say "stocks with the highest yields are the first to cut distributions when trouble arises", wouldn't it be better to say that when a stock has a high yield it means that the market has perceived impending trouble and driven the share price down? In that case, the job is to decide whether the trouble will pass and the price rebound.
ReplyDeleteWhat do you think of CINF, Cincinnati Financial? They have a very high dividend and the stock price is down 1.15% for the month. I think you analyzed it a while ago. But what do you think now?
ReplyDeleteDavid,
ReplyDeleteYour comment sounds like a good addition to what I already posted. When times get tough, as stock prices decline yields increase dramatically if payments are unchanged. More likely than not, a rapid increase in dividend yield does signal that the market is pricing in a dividend cut. And then the cut is materialized some time down the road. For example, before the financial crisis hit, one could purchase GE stock at $31 in 2008, for a 4% yield ( the qtrly div pmt was 0.31/share). As the crisis intensified the stock price dipped to $8-$10/share and the dividend was cut to 10 cents/quarter. At $10/share the yield was also 4%..
But you are correct that evaluating dividend investments during a crisis boils down to assessing whether the trouble will pass or not..
Perpetua,
I would rate CINF as a hold. As long as the dividend is maintained I see no reason to sell.
Well done!
ReplyDelete