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

Japanese government concerned by yen's rapid fall against dollar
Tokyo, Nov 21 (IANS/EFE) Japanese Finance Minister Taro Aso Friday expressed concern over the sharp depreciation of the yen against the dollar this week, and said abrupt movements in the foreign exchange market were not beneficial to the Japanese economy.
WHO declares DRC Ebola-free
Geneva, Nov 21 (IANS) The World Health Organisation (WHO) Friday declared the end of the Ebola outbreak in the Democratic Republic of Congo (DRC).
Ultra rich population getting richer: Study
Washington, Nov 21 (IANS) Only 0.004 percent of the world's high networth adult population controls almost 13 percent of the world's total wealth, according to a new study.
Morocco, US organisation sign MoU on 'Enterprise City' project
Marrakech, Nov 21 (IANS) The Moroccan government and US institution Babson Global have signed a memorandum of understanding to conduct a feasibility study for the establishment of an "Enterprise City", a city dedicated to business, in the North African country.

Latest from the Network

Chinese court upholds life sentence against Uyghur activist
Beijing, Nov 21 (IANS/EFE) A court in western China has upheld the conviction and life sentence handed down against Uyghur activist Ilham Tohti, who appealed the sentence when it was first passed in September, one of...
Read more on Politics Balla
Matt Smith to star in Patient Zero
Matt Smith has been cast in 'Patient Zero'. The former 'Doctor Who' star has signed on to appear in the infection film which will see him have to cope with the aftermath of a worldwide viral pandemic across the Earth....
Read more on Movie Balla
Mick Jagger praises 'amazing' Chadwick Boseman
Sir Mick Jagger claims Chadwick Boseman is ''amazing'' as James Brown in the singer's biopic 'Get On Up'. The 71-year-old Rolling Stones rocker co-produced the movie and praised the young actor for his portrayal of the...
Read more on Movie Balla
South African president calls for end to racism in sports
Johannesburg, Nov 21 (IANS) South African President Jacob Zuma Friday called for global efforts to end racism in sports. South Africa adds its voice to the billions of others throughout the world who are determined to...
Read more on Sport Balla
Sheamus wants reality show for WWE Superstars
Sheamus wants to appear in a reality TV show about the WWE Superstars. The 36-year-old star believes the success of E! series 'Total Divas', which follows the lives of the female competitors in the company, has shown...
Read more on Celebrity Balla
Bill Murray: Actors are heroes
Bill Murray thinks actors are heroes. The 'Ghostbusters' star - who recently had an entire day dedicated to him at Toronto Film Festival - claims people admire actors so much because they get to escape reality by...
Read more on Celebrity Balla
Robin Williams' son: We're doing OK
Robin Williams' son says the late star's family are still adapting ''to the new normal'' following his father's death. The Hollywood actor died from asphyxia due to hanging at his home in August aged 63 and his eldest...
Read more on Celebrity Balla
Jennifer Lopez exfoliates with diamonds
Jennifer Lopez exfoliates her legs with diamonds. The 'On the Floor' hitmaker reportedly swears by a $250 Australian-made body scrub that is made with ''diamond powder'' to keep cellulite at bay. A source close to the...
Read more on Celebrity Balla
Indian golfers Atwal, Rashid tied 15th in Manila Masters
Manila, Nov 21 (IANS) Indian golfers Arjun Atwal and Rashid Khan shared the 15th position after the second round of the $1 million Manila Masters at the par-72 Manila Southwoods Golf and Country Club here Friday....
Read more on Sport Balla
Sarjubala, Saweety enter women's World boxing semis
Jeju (South Korea), Nov 21 (IANS) Indian boxers Shamjetsabam Sarjubala and Saweety reached the semi-finals of the Women's World Championships here Friday. Sarjubala started the proceedings with a dominating 3:0 win...
Read more on Sport Balla