8 Stocks With A Little Something Extra

Feb 20 2014, 9:20am CST | by

Who doesn’t love a little something extra—a gift with purchase, a bonus of some kind? Well, in equity investing, those “little extras” can add up to a whole lot.

Investment professionals often talk about “total returns” from stock investments. Simply put, a stock’s total annual return consists of annual appreciation—i.e. how much it went up (or down) that year—and the dividends paid annually.

Here’s the amazing part though. Historically, dividends—the little bonus paid to shareholders—have contributed to approximately half of the market’s total return.  Consider this: The historic return on the stock market since 1929 is about 9.5%—half of which can be attributed to dividends, according to Standard & Poor’s.

So choosing a solid company with dividend paying stocks is tapping into all the upside potential the stock market has to offer without having to try to “pick a winner” from unfamiliar companies that just happen to be in the news a lot.

Dividend-paying stocks won’t as a rule provide “explosive” growth, but they can grow and compound faster than inflation (or a CD in a bank).

Here are some I like and their dividend yields.

Stock (ticker) Yield
Illinois Tool Works (ITW) 2.1%
Eli Lilly (LLY) 3.8%
McDonald’s (MCD) 3.4%
Microsoft (MSFT) 3.0%
Owens & Minor (OMI) 2.8%
Southern Company (SO) 4.9%
Sysco (SYY) 3.3%
Walmart (WMT) 2.5%

What I like about these companies is the strong dividend yield (cash dividend ÷ stock price), a strong balance sheet and, perhaps most importantly, the growth in their dividends. Not only do dividends add to the total return, but dividends that grow over time offer a significant hedge against inflation.  To see this look at the chart below that shows the average annual growth in dividends annually from 2003 to 2013.

Average annual growth in dividends 2003-2013

Illinois Tool Works (ITW) 13.0%
Eil Lilly (LLY) 3.9%
McDonald’s (MCD) 22.8%
Microsoft (MSFT) 19.8%
Owens & Minor (OMI) 15.4%
Southern Company (SO) 3.8%
Sysco (SYY) 9.4%
Walmart (WMT) 18.0%

All of these companies have bested the inflation rate of 2.4% since 2003, some rather spectacularly. Stodgy old McDonald’s, for instance beat the rate of inflation by a factor of nearly 10x.  That’s some inflation hedge.  Even 102-year-old Illinois Tool Works beat the rate of inflation by almost 5x.

When looking for dividend paying companies, it’s important to pick companies that have the ability to keep paying them even when there is volatility in their revenues or earnings.  One way to get at this is to look at the dividend payout ratio (dividend per share ÷ earnings per share).  This ratio tells you what percent of the company’s profits are allocated to dividends. The chart below shows these dividend payout ratio for our favored companies.

Dividend Payout Ratios

Illinois Tool Works (ITW) 42.6%
Eil Lilly (LLY) 45.4%
McDonald’s (MCD) 55.8%
Microsoft (MSFT) 35.5%
Owens & Minor (OMI) 54.9%
Southern Company (SO) 107.5%
Sysco (SYY) 67.7%
Walmart (WMT) 36.0%

Intuitively, it’s easy to understand that a company that pays 90% of its profits in an annual dividend totaling, say, $1.00, will have trouble paying its dividend in a year when revenues or profits decrease by 25%. By contrast, Microsoft, shown in the chart above, uses just 36% of it’s profits to pay its annual dividend of $1.02.  Should revenue or profits decline at MSFT in any given year, the company has plenty of “cushion” to continue paying it’s shareholders $1.02.

Note the Southern Company dividend payout ratio of 107%.  That means if profits are $1.00, the annual dividend is $1.07, a seemingly unsustainable payout. However, as a utility, Southern Company has lots of depreciation, which is counted as an expense, but does not really use cash. When looking at the cash flow of Southern—which is different from profits—I feel the company can continue to pay a dividend without interruption.

There are plenty of great companies out there that pay a good dividend and have a track record of increasing them over time.  The ones shown in this article were chosen for our “Dividend Buster” portfolios for their dividend track records, as well as strong balance sheets too, which will help keep investor’s cash flows strong, even when the economy gets choppy.

Source: Forbes Business


Don't miss ...


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

Finnish scientists identify new type of black hole
Helsinki, Oct 31 (IANS) Finnish researchers have discovered a new type of low-mass black hole, which is a bright celestial body that emits X-ray, the University of Turku has said.
Union Carbide ex-chief Warren Anderson is dead
Washington, Oct 31 (IANS) Warren Anderson, former chief executive officer of the Union Carbide Corporation, is dead, a media report said Friday. He was 92.
Himalayan Viagra fuels gold rush for local Tibetans
Washington, Oct 31 (IANS) Overwhelmed by people trying to find the prized medicinal fungus known as Himalayan Viagra, two isolated Tibetan communities have managed to implement a successful system for the sustainable harvest of the precious natural resource, suggests research.
Oceans were always there on Earth: Scientists
Washington, Oct 31 (IANS) Debunking previous theories that water came late to Earth well after the planet had formed, researchers have significantly moved back the clock for the first evidence of water on Earth and in the inner solar system.

Latest from the Network

Julia Stiles and Ray Liotta cast in Go With Me
Julia Stiles and Ray Liotta have been added to the cast of Anthony Hopkins' new film 'Go With Me'. The action-drama, which will begin shooting in mid-November, tells the story of a young woman who returns to her home...
Read more on Movie Balla
Seth Rogen to star in Steve Jobs biopic
Seth Rogen is in talks to star in Sony's Steve Jobs biopic. The 'Bad Neighbours' star is in negotiations with the studio to take on the role of Apple co-founder Steve Wozniak - who created the Apple I computer and co-...
Read more on Movie Balla
Jennifer Lopez has struggled to love herself
Jennifer Lopez say she's spent much of her life beating herself up for not being good enough. The 'Dance Again' hitmaker, who has six-year-old twins Max and Emme with her third ex-husband, Marc Anthony, puts a lot of...
Read more on Celebrity Balla
Julianne Hough's teary tribute to sister
Julianne Hough broke down in tears while praising her older sister. The 26-year-old singer/songwriter made an emotional speech in which she praised her older sister, Sharee Wise, admitting her sibling inspired her to...
Read more on Celebrity Balla
Tom Parker vows to look after Lindsay Lohan
Tom Parker has vowed to look after Lindsay Lohan. The former Wanted star is keeping a watchful eye over the 28-year-old actress as she performs in play 'Speed-the-Plow' in London because he wants to help the flame-...
Read more on Celebrity Balla
Kaley Cuoco-Sweeting fell for husband over animals
Kaley Cuoco-Sweeting knew her husband was 'The One' because he loves animals. The 'Big Bang Theory' star, who married tennis player Ryan Sweeting in December after just six months of dating, admits she fell in love with...
Read more on Celebrity Balla
Orson Welles last film to be released
Orson Welles' final movie will finally be released next year. The acclaimed filmmaker had worked on 'The Other Side of the Wind' - which chronicles a temperamental film director battling with the Hollywood establishment...
Read more on Movie Balla
Game of Thrones stars get pay rise
'Games of Thrones' cast members will be paid $300,000 an episode. Five of the shows biggest stars - Peter Dinklage, Kit Harington, Lena Headey, Emilia Clarke and Nikolaj Coster-Waldau - have landed bumper payrises after...
Read more on Celebrity Balla
Mike Tyson: I was abused
Mike Tyson claims he was sexually abused as a child. The 48-year-old retired boxer was ''snatched'' off the street when he was seven by an ''old man'', who he never saw again after the shocking one-time incident....
Read more on Celebrity Balla
Amanda Bynes released from psychiatric facility
Amanda Bynes has been released from a psychiatric treatment facility. The 'Easy A' actress was spotted walking around Sunset Strip, West Hollywood, last night (30.10.14), 19 days after she was admitted to the hospital...
Read more on Celebrity Balla