The only curve I like is the
dividend curve.
Dividend paying companies with wise and facile leaders tend
to weather storms well. These leaders
and their management teams will question if they can do it. Yet so many companies can adapt, change and
emerge. The end result is steady, ever
increasing income for those of us who do not work any more.
The Dividend Curve: “I only
care if they can deliver income and income growth.”
If a company can deliver a dividend and show they are
responsible custodians of the owners' money, it is highly likely to see future stock
price appreciation. A stock that can
deliver income during difficult times is a stock to consider for the good
times. We expect dividend increases eventually or we will look elsewhere. A capital gain is an additional perquisite.
As an income investor, I want to invest in the companies that
deliver income during difficult times. Below
are three dividend stocks that are a bit stodgy but have a history of both
staying around and delivering more income to their stock holders. They made it through a few pretty major
market disruptions. Let’s hope they are ready to deliver as they meet the growing
needs of the globe’s population.
I look for stocks that have solid historic
fundamentals. I have written often
about my criteria for picking a dividend stock; in this post, I concentrate on
dividend growth. Three stocks that I
bought during the first year of writing this blog provide the substance.
Intel (INTC), Waste
Management (WM), and Travelers (TRV)
You could not find three more different stocks than the
three I look at today. Each one of these
stocks is a holding in my 2011 model portfolio. At the time, they met my four
2011 criteria which were: earnings per share (EPS) greater than dividends paid
out, 3 percent minimal dividend yield, history of dividend increases and a debt
to equity ratio (D/E) of 1 or less or equal to industry standards. Use these links to review the Dividend
Machine fundamentals of INTC, WM and TRV in 2011.
INTC - http://www.themoneymadam.com/2011/03/intel-symbol-intc-dividend-machine-for.html
INTC - http://www.themoneymadam.com/2011/03/intel-symbol-intc-dividend-machine-for.html
TRV - http://www.themoneymadam.com/2011/08/travelers-company-symbol-trv-dividend.html
Dividend Curve
Dividend Curve
To measure and compare the dividend curves of these three
stocks, I used the first quarter dividend each year beginning with 2011 and up
to and including 2016. The raw table
data and the chart showing the dividend growth of each stock is below.
Travelers is the winner when using the dividend curve as a
measure. The other two stocks, Intel and
Waste Management have not grown their dividends as robustly as TRV, but each one
exhibits steady dividend growth of greater than 4% over the time frame
presented.
2016 Dividend Fundamentals
Would I buy any one of these three stocks today? In the tables below, I present the
fundamental data I use to screen dividend income stocks in 2016.
Intel (INTC )
Travelers (TRV)
Waste Management (WM)
Notice that I have adjusted my original criteria a bit. I lowered the required dividend yield and
this is because when I raised that hurdle in 2014 and 2015, I ended up over
concentrated in the high yielding energy patch.
Lowering the minimal yield expands the universe of stocks from which to
choose.
Covered Call Potential
To make up for the low income produced from a 2.75% yield, I
added the potential to boost income with covered calls. I need at least 8% total return if my stock
is assigned (also known as called away.)
When a stock is assigned, the call buyer buys it from you. Moreover, I am very happy if I can land 4%
income on a solid stock that I have every reason to believe will not go belly
up. (More on that later; financial
strength.)
Intel wins on this metric.
If you bought Intel on Friday at $35.50, simultaneously sold a January $37
call for $.60 and received the dividend, your yield on basis is 4.46%. If the world roars, you can do it again next
year maybe more than once If the world
wanes, you get your dividend yield at a minimum. You could suffer capital
losses but it is highly likely this stock will deliver at least the same yield
with a chance for yield growth later on.
Intel (INTC)
Travelers (TRV)
Waste Management (WM)
Revenue Growth
In 2016 I also added in revenue growth as one of my
screening criteria. I did this because revenue is the mother’s milk of
dividends. When revenue grows, there is
a good chance that dividends will growth as well. It is not guaranteed but more likely.
On this metric, not one of these three stocks hits the 4%
hurdle. Intel performed the best. This is where I am hoping their leadership,
culture, and facile management will deliver in the future. All I want is a positive dividend curve and
that can only happen when revenues grow.
Some of you will argue that improving earnings are enough to
fund dividend growth. This strategy will
work for a while but not forever. Growth
of the dividend requires growth of the money coming in: revenue!
Financial Strength
Every serious investor must evaluate the financial strength
of a stock whose dividend payments will someday become their paycheck. I start with D/E (debt to equity ratio) and I
like to see a company that has a ratio of debt (money they owe) to equity
(value of what they own) no more than 1.
Yet, companies who need a lot of money to build just one item (think
bridges etc.) need more capital and tend to carry more debt than Intel or
Travelers. In that event, you want a
company with a D/E ratio no more than industry standard.
Both Travelers and Intel pass this hurdle without
difficulty. Waste Management does not.
WM loses on D/E ratio. One can understand why Waste
Management carries such high debt when you look at the size of every piece of
their operation from the size of a dump truck to the size of a dump drop off
site. But, Waste Management’s rival is Republic
Services (RSG) has D/E ratio of only .98.
Intel (INTC)
Travelers (TRV)
Waste Management (WM)
Conclusion
Only you can decide if any one of these stocks will meet
your needs in 10 years (if you are 65 years old) 20 years (if you are 55 years
old) or 30 years (if you are 45 years old.)
Based on the past five plus years, the historical record presented here
may help you decide how to build an income portfolio. I will be adding to Intel and selling calls on part of my position as they become available.
M* MoneyMadam
Disclosure: Long INTC with calls
