Sunday, October 23, 2016

Dividend Curve: Three stocks to consider for income INTC, TRV, WM



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

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