By Philip van Doorn, MarketWatch
There are no safe bets when selecting stocks, but if you’re looking for income, a company’s track record for paying dividends might outweigh concerns over its share price.
A review of the worst-performing Dividend Aristocrat stocks this year illustrates that point.
The S&P 500 Dividend Aristocrats Index /zigman2/quotes/210598428/delayed XX:SP50DIV -0.08% is made up of the 51 S&P 500 /zigman2/quotes/210599714/realtime SPX +1.46% companies that have raised regular dividend payouts for at least 25 years. One way to invest in the entire index is the $3.1 billion ProShares S&P 500 Dividend Aristocrats ETF /zigman2/quotes/208747379/composite NOBL +1.79% , which attempts to mirror the index. (Disclosure: I hold shares of this ETF.)
Here’s how the S&P 500 Dividend Aristocrats Index’s total return has compared to that of the S&P 500 over the past 10 years:
S&P Dow Jones Indices maintains that index and also the broader S&P High-Yield Dividend Aristocrats Index /zigman2/quotes/210599901/delayed XX:SPHYDA +1.76% , which is made up of the 107 companies included in the S&P 1500 Composite Index that have raised regular dividends for at least 20 years. So any Dividend Aristocrat is also a high-yield Dividend Aristocrat. One way to play the high-yield Aristocrats as a group is the SPDR S&P Dividend /zigman2/quotes/206871683/composite SDY +1.78% .
In 2016, the best-performing S&P 500 sector was energy, propelled by rising oil prices. The second-best performer was telecommunications, with a 23.5% return.
Fast foward to 2017, and energy is now the worst sector, down 12.4%, as the price of West Texas crude oil /zigman2/quotes/211629951/delayed CL.1 +0.47% has declined 8.5%. Telecommunications is second-worst, down 10.1%. As you can see in the table below, AT&T Inc. /zigman2/quotes/203165245/composite T +1.04% , which, along with rival Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ +1.27% dominates the industry in the U.S., has declined this year, though it has generated plenty of cash flow to support a higher dividend payout.
To make a wide scan of consistent dividend payers that might be bargains, we put together a list of the 16 high-yield Dividend Aristocrats that have suffered price declines of 10% or more this year, along with a measure of each company’s dividend-paying ability:
|Company||Ticker||Industry||Price decline - 2017 through Sept. 6||Dividend yield||Free cash flow yield - past 12 months||‘Headroom’|
|Tanger Factory Outlet Centers Inc.||/zigman2/quotes/204622836/composite SKT||Real Estate Investment Trusts||-32%||5.62%||9.68%||4.06%|
|W.W. Granger Inc.||/zigman2/quotes/200853098/composite GWW||Wholesale Distributors||-29%||3.12%||7.73%||4.61%|
|United Bankshares Inc.||/zigman2/quotes/202436974/composite UBSI||Regional Banks||-29%||4.00%||3.48%||-0.52%|
|Target Corp.||/zigman2/quotes/207799045/composite TGT||Discount Stores||-20%||4.27%||15.01%||10.73%|
|Community Bank System Inc.||/zigman2/quotes/204361813/composite CBU||Regional Banks||-19%||2.70%||5.80%||3.09%|
|RLI Corp.||/zigman2/quotes/201994452/composite RLI||Property/ Casualty Insurance||-17%||1.60%||7.15%||5.54%|
|Lancaster Colony Corp.||/zigman2/quotes/204539353/composite LANC||Food: Specialty/ Candy||-16%||1.85%||3.60%||1.75%|
|People’s United Financial Corp.||Savings Banks||-15%||4.19%||5.75%||1.55%|
|AT&T Inc.||/zigman2/quotes/203165245/composite T||Telecomm.||-14%||5.36%||6.99%||1.63%|
|Carlisle Cos.||/zigman2/quotes/206929371/composite CSL||Misc. Manufacturing||-14%||1.56%||5.86%||4.30%|
|International Business Machines Corp.||/zigman2/quotes/203856914/composite IBM||Information Technology Services||-13%||4.17%||8.97%||4.80%|
|Exxon Mobile Corp.||/zigman2/quotes/204455864/composite XOM||Integrated Oil||-13%||3.91%||4.34%||0.43%|
|Hormel Foods Corp.||/zigman2/quotes/209170265/composite HRL||Food: Meat/ Fish/ Dairy||-11%||2.20%||4.07%||1.87%|
|Bemis Co.||Containers/ Packaging||-11%||2.81%||6.53%||3.72%|
|Genuine Parts Co.||/zigman2/quotes/204247574/composite GPC||Wholesale Distributors||-11%||3.16%||4.73%||1.57%|
|Ross Stores Inc.||/zigman2/quotes/202639496/composite ROST||Apparel/ Footwear Retail||-10%||1.08%||5.51%||4.43%|
|Sources: S&P Dow Jones Indices, FactSet|
You can click on the tickers for news coverage and other information about each company, including charts, ratios and financials.
As you can see, not all the dividend yields are impressive. The Dividend Aristocrat designation doesn’t take yield into account, only the consistency of annual dividend increases. But nine of the stocks have yields above 3%, which compare quite favorably with the 2.05% yield for 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.69% .
A company’s free cash flow is its remaining cash flow after planned capital expenditures. This is money that can be used for dividend payouts, or to fund acquisitions, organic expansion, stock buybacks or for any corporate purpose. The free cash flow yield is calculated by dividing the past 12 reported months’ free cash flow per share by the previous closing share price. If the free cash flow yield is higher than the dividend yield, the company appears to have “headroom” to raise the dividend, or at least to maintain it comfortably.
For Tanger Factory Outlet Centers /zigman2/quotes/204622836/composite SKT +2.96% the one real estate investment trust on the list, we used funds from operations (FFO) instead of free cash flow for the “headroom” calculation, because this non-GAAP measure is most often used to gauge dividend-paying ability in the REIT industry. FFO adss depreciation and amortization to earnings and subtracts gains from the sale of real estate.
Only one company on the list, United Bankshares Inc. /zigman2/quotes/202436974/composite UBSI +3.00% , has a free cash flow yield for the past 12 months that is lower than the current dividend yield.
AT&T’s shares are down 14% this year, not including dividends. But you can see that the company has plenty of excess cash flow to maintain and probably raise the dividend (considering its status as a Dividend Aristocrat).
The herd mentality of the stock market might cause you to shy away from International Business Machines Corp. /zigman2/quotes/203856914/composite IBM -0.42% and Target Corp. /zigman2/quotes/207799045/composite TGT +2.05% , especially when you consider the difficult competition and industry shifts those companies face. However, both have attractive dividend yields and very high levels of free cash flow to support current, and higher, payouts to investors.
No “first screen” of stocks is enough to base investment decisions on. If you are interested in any of these companies, you need to consider their prospects for business expansion or recovery, as well as their ability to keep running those cash-flow gravy trains. You should also discuss the companies’ prospects, including the dividends, with your broker or investment adviser.