By Philip van Doorn
This is the time of the year when Wall Street prognosticators do their best to entertain investors with predictions.
But after two excellent years for U.S. stocks, maybe it’s time to position yourself to enjoy high and well-supported dividends if the market turns sour in 2022.
Many companies have rebounded this year from low sales during the pandemic doldrums of 2020, or in the case of banks, enjoyed a massive bump to earnings as they released loan-loss reserves. So the following dividend-stock screen looks forward, using consensus estimates for 2022.
If you look at the headline link above — maybe investors should always proceed with caution. Despite good economic news — the latest being the lowest number of weekly unemployment claims since 1969 — stock-market performance in 2022 could be tamped-down by another coronavirus variant or high inflation, if it turns out to be a longer-term phenomenon.
And the Federal Open Market Committee announced on Dec. 15 a policy change to end Federal Reserve bond purchases in March .
The benefit of dividend stocks is obvious to investors who need current income, but it may also be soothing for any investor to be paid to wait if the market is weak for a while.
High-yielding dividend stocks with ‘headroom’
A stock with a high dividend yield has its attractions, but you probably want some comfort that the dividend won’t be cut — that means excess cash flow beyond what it is already paying out.
One way to measure dividend-paying ability is to look at a company’s free cash flow yield. Free cash flow is remaining cash flow after planned capital expenditures. This money can be used to pay dividends, buy back shares (which can raise earnings and cash flow per share), or fund acquisitions, organic expansion or for other corporate purposes. If we divide a company’s annual free cash flow per share by its current share price, we have its free cash flow yield. If we compare the free cash flow yield to the current dividend yield, we may see “headroom” for cash to be deployed in ways that can benefit shareholders.
For the following screen, we began with the S&P 1500 Composite Index /zigman2/quotes/210600453/delayed XX:SP1500 -4.00% , which is made up of the S&P 500 /zigman2/quotes/210599714/realtime SPX -4.04% , the S&P 400 Mid Cap Index /zigman2/quotes/219506813/composite MID -4.33% and the S&P Small Cap 600 Index /zigman2/quotes/210599868/delayed SML -3.18% .
Here are the criteria for the screen:
Dividend yield of at least 3.00%, which is more than twice the current yield on 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.11% .
“Headroom,” based on consensus estimates for free cash flow per share for calendar 2022, among analysts polled by FactSet. These estimates are not available for most companies in the financial sector, so the screen for that group was done using earnings-per-share estimates. For real estate investment trusts, the headroom screen is based on consensus 2022 estimates for funds from operations (FFO) per share, which is a non-GAAP calculation commonly used in the REIT industry to measure dividend-paying ability.
Majority “buy” or equivalent ratings among analysts polled by FactSet, with a minimum of five analysts covering each company.
Of course, companies for which the appropriate estimate for 2022 wasn’t available were excluded from the screen.